~~UNITED STATES~~

~~SECURITIES AND EXCHANGE COMMISSION~~

~~Washington, D.C. 20549~~

~~FORM~~

~~10-Q~~UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~For the quarterly period ended June 30, 2021~~

For the quarterly period ended June 30, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~For the transition period from to~~

For the transition period from toCommission File Number 1-13270


FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Delaware

90-0023731

(State of other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

8846 N. Sam Houston Parkway W. Houston,TX

77064

~~Houston, TX~~

~~77064~~

(Address of principal executive offices)

(Zip Code)

(713) 849-9911

(Registrant’s telephone number, including area code)


~~Securities registered pursuant to Section 12(b) of the Act:~~
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	FTK	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the ~~Exchange~~ Act.

Large accelerated filer☐Accelerated filer ☐Non-accelerated filer ☒

Smaller reporting company ☒Emerging growth company ☐

☐

~~Accelerated Filer~~

☒

~~Non-accelerated filer~~

☐

~~Smaller reporting company~~

☒

~~Emerging growth company~~

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

~~As of~~At August ~~5, 2021,~~10, 2022, there were ~~74,098,258~~76,597,249 outstanding shares of ~~Flotek Industries, Inc.~~the registrant’s common stock, $0.0001 par value.

TABLE OF CONTENTS



Forward-Looking Statements		3

PART I—I - FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets at June 30, ~~2021~~2022 and December 31, ~~2020~~ 2021	4
	Unaudited Condensed Consolidated Statements of Operations for the ~~three~~ three and si xsix months ended June 30, ~~2021~~2022 and ~~2020~~2021	5
	Unaudited Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~2021~~2022 and ~~2020~~2021	7
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, ~~2021~~2022 and ~~2020~~2021	8
	Notes to Unaudited Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2531

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3338

Item 4.	Controls and Procedures	3338

PART ~~II—~~II - OTHER INFORMATION

Item 1.	~~Legal~~Legal Proceedings	3539

Item ~~1A.~~1A	Risk Factors	3539

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3539

Item 3.	Defaults Upon Senior Securities	3539

Item 4.	Mine Safety Disclosures	3639

Item 5.	Other Information	3639

Item 6.	Exhibits	3740

~~SIGNATURES~~
SIGNATURES		3841

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q ~~(“Quarterly~~(this “Quarterly Report”), and in particular, Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of ~~1995, as amended.~~1995. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek Industries, Inc. (“Flotek” or the “Company”), many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.

The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, ~~financial conditions,~~ future operating results and ~~liquidity, including but not limited to the impact of the COVID-19 pandemic, pending litigation, commodity prices and other circumstances.~~liquidity. These forward-looking statements generally are identified by words including but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” ~~“could,”~~“could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereafter. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.

A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (“Annual Report” or ~~“2020~~“2021 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March ~~16, 2021,~~31, 2022, and periodically in subsequent reports filed with the SEC. The Company has no obligation, and we disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.

PART I —- FINANCIAL INFORMATION

Item 1. Financial Statements

FLOTEK INDUSTRIES ~~INC.~~

INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

~~(in~~ (in thousands, except share data)


		June 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	27,781	$	38,660	Cash and cash equivalents	$	33,084	$	11,534
Restricted cash	Restricted cash	40		664		Restricted cash	40		1,790
Accounts receivable, net of allowance for doubtful accounts of $1,329 and $1,316 at June 30, 2021 and December 31, 2020, respectively		9,713		11,764
Accounts receivable, net of allowance for doubtful accounts of $514 and $659 at June 30, 2022 and December 31, 2021, respectively						Accounts receivable, net of allowance for doubtful accounts of $514 and $659 at June 30, 2022 and December 31, 2021, respectively	11,747		13,297
Accounts receivable, related party						Accounts receivable, related party	11,603		—
Inventories, net	Inventories, net	11,499		11,837		Inventories, net	13,249		9,454

Income taxes receivable		71		403

Other current assets	Other current assets	3,255		3,127		Other current assets	4,000		3,762
Current contract assets						Current contract assets	6,260		—
Assets held for sale	Assets held for sale	546		0		Assets held for sale	535		2,762
Total current assets	Total current assets	52,905		66,455		Total current assets	80,518		42,599
Property and equipment, net	Property and equipment, net	8,017		9,087		Property and equipment, net	4,819		5,296
Operating lease right-of-use assets	Operating lease right-of-use assets	2,162		2,320		Operating lease right-of-use assets	1,771		2,041
Goodwill		8,092		8,092

Deferred tax assets, net	Deferred tax assets, net	213		223		Deferred tax assets, net	283		279

Other long-term assets	Other long-term assets	29		33		Other long-term assets	17		29

Long term contract assets						Long term contract assets	76,063		—
TOTAL ASSETS	TOTAL ASSETS	$	71,418	$	86,210	TOTAL ASSETS	$	163,471	$	50,244

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	6,587	$	5,787	Accounts payable	$	19,771	$	7,616
Accrued liabilities	Accrued liabilities	17,221		18,275		Accrued liabilities	7,115		8,996
Income taxes payable	Income taxes payable	39		21		Income taxes payable	103		4
Interest payable	Interest payable	58		34		Interest payable	106		82

Current portion of operating lease liabilities	Current portion of operating lease liabilities	589		636		Current portion of operating lease liabilities	636		602
Current portion of finance lease liabilities	Current portion of finance lease liabilities	55		60		Current portion of finance lease liabilities	34		41
Current portion of long-term debt	Current portion of long-term debt	4,788		4,048		Current portion of long-term debt	1,690		1,436

Convertible notes payable						Convertible notes payable	18,323		—
Contract consideration convertible notes payable						Contract consideration convertible notes payable	67,220		—
Total current liabilities	Total current liabilities	29,337		28,861		Total current liabilities	114,998		18,777
Deferred revenue, long-term	Deferred revenue, long-term	104		117		Deferred revenue, long-term	84		91
Long-term operating lease liabilities	Long-term operating lease liabilities	8,011		8,348		Long-term operating lease liabilities	6,695		7,779
Long-term finance lease liabilities	Long-term finance lease liabilities	72		96		Long-term finance lease liabilities	38		53
Long-term debt	Long-term debt	0		1,617		Long-term debt	3,098		3,352

TOTAL LIABILITIES	TOTAL LIABILITIES	37,524		39,039		TOTAL LIABILITIES	124,913		30,052
Commitments and contingencies (See Note 13)		0		0
Commitments and contingencies (See Note 12)						Commitments and contingencies (See Note 12)	0		0
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; 0 shares issued and outstanding		0		0
Common stock, $0.0001 par value, 140,000,000 shares authorized; 79,606,743 shares issued and 70,152,591 shares outstanding at June 30, 2021; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020		8		8
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding						Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding	—		—
Common stock, $0.0001 par value, 140,000,000 shares authorized; 82,884,690 shares issued and 76,773,333 shares outstanding at June 30, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021						Common stock, $0.0001 par value, 140,000,000 shares authorized; 82,884,690 shares issued and 76,773,333 shares outstanding at June 30, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021	8		8
Additional paid-in capital	Additional paid-in capital	361,424		359,721		Additional paid-in capital	386,310		363,417
Accumulated other comprehensive income (loss)		13		(19)
Accumulated other comprehensive income						Accumulated other comprehensive income	176		81
Accumulated deficit	Accumulated deficit	(293,534)		(278,688)		Accumulated deficit	(313,698)		(309,214)
Treasury stock, at cost; 5,627,646 and 5,580,920 shares at June 30, 2021 and December 31, 2020, respectively		(34,017)		(33,851)

Treasury stock, at cost; 6,111,357 and 6,022,634 shares at June 30, 2022 and December 31, 2021 , respectively						Treasury stock, at cost; 6,111,357 and 6,022,634 shares at June 30, 2022 and December 31, 2021 , respectively	(34,238)		(34,100)
Total stockholders’ equity	Total stockholders’ equity	33,894		47,171		Total stockholders’ equity	38,558		20,192
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	71,418	$	86,210	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	163,471	$	50,244

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)
Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Revenue $ 9,165 $ 8,880 $ 20,935 $ 28,296
Costs and expenses:
Operating expenses (excluding depreciation and amortization) 12,110 11,632 25,911 34,473
Corporate general and administrative 2,868 5,395 7,229 9,888
Depreciation and amortization 253 468 560 2,659
Research and development 1,466 1,638 3,008 4,193
Gain on disposal of long-lived assets (71) (22) (69) (55)
Impairment of fixed, long-lived and intangible assets 0 0 0 57,454
Total costs and expenses 16,626 19,111 36,639 108,612
Loss from operations (7,461) (10,231) (15,704) (80,316)
Other (expense) income:
Payment Protection Program forgiveness 881 0 881 0
Gain on lease termination 0 576 0 576
Interest expense (17) (16) (35) (20)
Other income, net 72 78 39 31
Total other income, net 936 638 885 587
Loss before income taxes (6,525) (9,593) (14,819) (79,729)
Income tax (expense) benefit (21) 32 (27) 6,201
Net loss $ (6,546) $ (9,561) $ (14,846) $ (73,528)
Loss per common share:
Basic $ (0.09) $ (0.14) $ (0.22) $ (1.17)
Diluted $ (0.09) $ (0.14) $ (0.22) $ (1.17)
Weighted average common shares:
Weighted average common shares used in computing basic loss per common share 69,531 66,035 69,001 62,828
Weighted average common shares used in computing diluted loss per common share 69,531 66,035 69,001 62,828


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Revenue:
Revenue from external customers	$	12,824	$	9,165	$	23,206	$	20,935
Revenue from related party	16,549		—		19,046		—
Total revenues	29,373		9,165		42,252		20,935
Cost of goods sold	31,678		10,775		45,036		22,853
Gross loss	(2,305)		(1,610)		(2,784)		(1,918)
Operating costs and expenses:
Selling, general, and administrative	7,431		4,203		12,310		10,287
Depreciation of property and equipment	182		253		377		560
Research and development	1,115		1,466		2,530		3,008
Gain on sale of property and equipment	(1,914)		(71)		(1,906)		(69)
Gain on lease termination	—		—		(584)		—
Change in fair value of contract consideration convertible notes payable	(17,158)		—		(13,266)		—
Total operating costs and expenses	(10,344)		5,851		(539)		13,786
Income (loss) from operations	8,039		(7,461)		(2,245)		(15,704)
Other income (expense):
Paycheck protection plan loan forgiveness	—		881		—		881
Interest expense	(1,597)		(17)		(2,265)		(35)
Other income (expense)	(104)		72		120		39
Total other income (expense)	(1,701)		936		(2,145)		885
Income (loss) before income taxes	6,338		(6,525)		(4,390)		(14,819)
Income tax expense	(98)		(21)		(94)		(27)
Net income (loss)	$	6,240	$	(6,546)	$	(4,484)	$	(14,846)










Income (loss) per common share:
Basic	$	0.08	$	(0.09)	$	(0.06)	$	(0.22)
Diluted	$	(0.05)	$	(0.09)	$	(0.12)	$	(0.22)










Weighted average common shares:
Weighted average common shares used in computing basic loss per common share	74,861		69,531		73,476		69,001
Weighted average common shares used in computing diluted loss per common share	124,335		69,531		107,086		69,001

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

~~UNAUDITED CONDENSED~~ CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~LOSS~~INCOME (LOSS)

(in thousands)

Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Net loss $ (6,546) $ (9,561) $ (14,846) $ (73,528)
Other comprehensive (loss) income:
Foreign currency translation adjustment (17) (7) 32 (130)
Comprehensive loss $ (6,563) $ (9,568) $ (14,814) $ (73,658)



	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Net income (loss)	$	6,240	$	(6,546)	$	(4,484)	$	(14,846)


Other comprehensive income (loss):
Foreign currency translation adjustment	87		(17)		95		32

Comprehensive income (loss)	$	6,327	$	(6,563)	$	(4,389)	$	(14,814)

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


		Six months ended June 30,					Six months ended June 30,
		2021		2020			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:

Net loss	Net loss	$	(14,846)	$	(73,528)	Net loss	$	(4,484)	$	(14,846)
Adjustments to reconcile net loss to net cash used in operating activities:	Adjustments to reconcile net loss to net cash used in operating activities:					Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of contingent consideration	Change in fair value of contingent consideration	(302)		0		Change in fair value of contingent consideration	(134)		(302)
Change in fair value of contract consideration convertible notes payable						Change in fair value of contract consideration convertible notes payable	(13,266)		—
Amortization of convertible note issuance cost						Amortization of convertible note issuance cost	414		—
Paid-in-kind interest expense						Paid-in-kind interest expense	1,819		—
Amortization of contract assets						Amortization of contract assets	737		—
Depreciation and amortization	Depreciation and amortization	560		2,659		Depreciation and amortization	377		560

Provision for doubtful accounts		(1)		474
Provision for doubtful accounts, net of recoveries						Provision for doubtful accounts, net of recoveries	87		(1)
Provision for excess and obsolete inventory	Provision for excess and obsolete inventory	580		529		Provision for excess and obsolete inventory	769		580

Impairment of right-of-use assets		0		7,434
Impairment of fixed assets		0		30,178
Impairment of intangible assets		0		19,842
Gain on sale of assets		(69)		(631)

Gain on sale of property and equipment						Gain on sale of property and equipment	(1,906)		(69)
Gain on lease termination						Gain on lease termination	(584)		—
Non-cash lease expense	Non-cash lease expense	163		242		Non-cash lease expense	112		163
Stock compensation expense	Stock compensation expense	1,750		1,521		Stock compensation expense	1,591		1,750
Deferred income tax provision (benefit)		10		(105)
PPP loan forgiveness		(881)		0
Deferred income tax (benefit) expense						Deferred income tax (benefit) expense	(5)		10
Paycheck protection plan loan forgiveness						Paycheck protection plan loan forgiveness	—		(881)
Changes in current assets and liabilities:	Changes in current assets and liabilities:					Changes in current assets and liabilities:

Accounts receivable, net		1,995		7,252
Inventories, net		(222)		6,418
Accounts receivable						Accounts receivable	(10,141)		1,995
Inventories						Inventories	(4,521)		(222)
Income taxes receivable	Income taxes receivable	207		(6,351)		Income taxes receivable	7		207
Other current assets	Other current assets	(672)		1,715		Other current assets	(244)		(672)
Contract asset, net						Contract asset, net	(3,600)		—
Other long-term assets	Other long-term assets	541		0		Other long-term assets	12		541
Accounts payable	Accounts payable	801		(10,229)		Accounts payable	12,154		801
Accrued liabilities	Accrued liabilities	(1,048)		(16,755)		Accrued liabilities	(2,924)		(1,048)
Operating lease liabilities						Operating lease liabilities	(308)		—
Income taxes payable	Income taxes payable	168		119		Income taxes payable	99		168
Interest payable	Interest payable	24		0		Interest payable	24		24

Net cash used in operating activities	Net cash used in operating activities	(11,242)		(29,216)		Net cash used in operating activities	(23,915)		(11,242)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capital expenditures	Capital expenditures	(31)		(42)		Capital expenditures	(5)		(31)
Proceeds from sale of business		0		9,844
Proceeds from sale of assets	Proceeds from sale of assets	74		66		Proceeds from sale of assets	4,194		74
Purchase of JP3, net of cash acquired		0		(26,284)

Abandonment of patents and other intangible assets		0		(8)
Net cash provided (used in) by investing activities		43		(16,424)

Net cash provided by investing activities						Net cash provided by investing activities	4,189		43
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Proceeds from Paycheck Protection Program loan		0		4,798
Purchase of treasury stock		(78)		(82)
Proceeds from sale of common stock		(166)		358

Proceeds from issuance of convertible notes						Proceeds from issuance of convertible notes	21,150		—
Payment of issuance costs of convertible notes						Payment of issuance costs of convertible notes	(1,084)		—
Proceeds from issuance of warrants						Proceeds from issuance of warrants	19,500		—
Payments to tax authorities for shares withheld from employees						Payments to tax authorities for shares withheld from employees	(138)		(78)
Proceeds from issuance of stock						Proceeds from issuance of stock	24		—

Purchase from sale of common stock						Purchase from sale of common stock	—		(166)
Payments for finance leases	Payments for finance leases	(29)		(51)		Payments for finance leases	(21)		(29)

Net cash (used in) provided by financing activities		(273)		5,023
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	39,431		(273)

Effect of changes in exchange rates on cash and cash equivalents	Effect of changes in exchange rates on cash and cash equivalents	(31)		(31)		Effect of changes in exchange rates on cash and cash equivalents	95		(31)
Net change in cash, cash equivalents and restricted cash	Net change in cash, cash equivalents and restricted cash	(11,503)		(40,648)		Net change in cash, cash equivalents and restricted cash	19,800		(11,503)
Cash and cash equivalents at the beginning of period	Cash and cash equivalents at the beginning of period	38,660		100,575		Cash and cash equivalents at the beginning of period	11,534		38,660
Restricted cash at the beginning of period	Restricted cash at the beginning of period	664		663		Restricted cash at the beginning of period	1,790		664
Cash and cash equivalents and restricted cash at beginning of period	Cash and cash equivalents and restricted cash at beginning of period	39,324		101,238		Cash and cash equivalents and restricted cash at beginning of period	13,324		39,324
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	27,781		59,926		Cash and cash equivalents at end of period	33,084		27,781
Restricted cash at the end of period	Restricted cash at the end of period	40		664		Restricted cash at the end of period	40		40
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	27,821	$	60,590	Cash, cash equivalents and restricted cash at end of period	$	33,124	$	27,821

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Six Months Ended June 30, 2022 and 2021

(~~in thousands)~~In thousands of U.S. dollars and shares)


Three months ended June 30, 2022																	Three months ended June 30, 2022
																			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
																			Shares Issued	Par Value		Shares	Cost								Total Stockholders’ Equity
Balance, March 31, 2022																	Balance, March 31, 2022		82,564	$	8	6,073	$	(34,159)	$	367,104	$	89	$	(319,938)		$	13,104

		Three months ended June 30, 2021
		Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit			Total Stockholders’ Equity
		Shares Issued	Par Value		Shares	Cost								Total Stockholders’ Equity
Balance, March 31, 2021		78,276	$	8	5,573	$	(33,956)	$	360,537	$	30	$	(286,988)				$	39,631
Net loss		—	—		—	—		—		—		(6,546)			(6,546)

Net income																	Net income		—	—		—	—		—		—		6,240			6,240
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—	—		—		(17)		—			(17)		Foreign currency translation adjustment		—	—		—	—		—		87		—			87

Stock issued under employee stock purchase plan	Stock issued under employee stock purchase plan	—	—		(26)	(38)		(2)		—		—			(40)		Stock issued under employee stock purchase plan		—	—		(19)	—		24		—		—			24

Restricted stock granted	Restricted stock granted	1,465			—	—		(7)		—		—			(7)		Restricted stock granted		339	—		—	—		—		—		—			—

Restricted stock forfeited	Restricted stock forfeited	(134)			25	54		(54)		—		—			0		Restricted stock forfeited		(3)	—		12	—		—		—		—			—
Treasury stock purchased		—	—		—			—		—		—			—

Stock compensation expense	Stock compensation expense	—	—		—	—		969		—		—			969		Stock compensation expense		—	—		—	—		852		—		—			852
Excess tax benefit related to share-based awards		—	—		56	(77)		(19)		—		—			(96)
Shares withheld to cover taxes																	Shares withheld to cover taxes		(15)	—		45	(79)		—		—		—			(79)
Issuance of stock warrants, net of transaction fee																	Issuance of stock warrants, net of transaction fee		—	—		—	—		9,930		—		—			9,930
Equity contribution																	Equity contribution		—	—		—	—		8,400		—		—			8,400

Balance, June 30, 2021		79,607	$	8	5,628	$	(34,017)	$	361,424	$	13	$	(293,534)		$	33,894
Balance, June 30, 2022																	Balance, June 30, 2022		82,885	$	8	6,111	$	(34,238)	$	386,310	$	176	$	(313,698)		$	38,558

Six months ended June 30, 2021
Common Stock Treasury Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated Deficit Total Stockholders’ Equity
Shares
Issued Par
Value Shares Cost
Balance, December 31, 2020 78,669 $ 8 5,581 $ (33,851) $ 359,721 $ (19) $ (278,688) $ 47,171
Net loss — — — — — — (14,846) (14,846)
Foreign currency translation adjustment — — — — — 32 — 32
Stock issued under employee stock purchase plan — — (84) (130) (47) — — (177)
Restricted stock granted 1,684 — — — — — — —
Restricted stock forfeited (133) — 30 64 — — — 64
Treasury stock purchased — — — — — — — —
Stock compensation expense — — — — 1,750 — — 1,750
Excess tax benefit related to share-based awards — — 101 (100) — — — (100)
Other (1) (613) — — — — — — —
Balance, June 30, 2021 79,607 $ 8 5,628 $ (34,017) $ 361,424 $ 13 $ (293,534) $ 33,894

~~(1) See Note 14, “Stockholders’ Equity” for further discussion.~~


Six months ended June 30, 2022
	Common Stock			Treasury Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total Stockholders’ Equity
	Shares Issued	Par Value		Shares		Cost
Balance, December 31, 2021	79,484	$	8	6,022		$	(34,100)		$	363,417		$	81		$	(309,214)		$	20,192
Net loss	—	—		—		—			—			—			(4,484)			(4,484)
Foreign currency translation adjustment	—	—		—		—			—			95			—			95

Stock issued under employee stock purchase plan	—	—		(19)		—			24			—			—			24



Restricted stock granted	626	—		—		—			—			—			—			—
Restricted stock forfeited	(3)	—		20		—			—			—			—			—

Stock compensation expense	—	—		—		—			1,591			—			—			1,591
Shares withheld to cover taxes	(15)	—		88		(138)			—			—			—			(138)
Issuance of stock warrants, net of transaction fee	—	—		—		—			9,930			—			—			9,930
Equity contribution									8,400									8,400
Conversion of notes to common stock	2,793	—		—		—			2,948			—			—			2,948

Balance, June 30, 2022	82,885	$	8	6,111	—	$	(34,238)	—	$	386,310	—	$	176	—	$	(313,698)	—	$	38,558

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.


Three months ended June 30, 2021
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, March 31, 2021	78,276	$	8	5,573	$	(33,956)	$	360,537	$	30	$	(286,988)	$	39,631


























Net loss	—	—		—	—		—		—		(6,546)		(6,546)
Foreign currency translation adjustment	—	—		—	—		—		(17)		—		(17)

Stock issued under employee stock purchase plan	—	—		(26)	(38)		(2)		—		—		(40)



Restricted stock granted	1,465	—		—	—		(7)		—		—		(7)

Restricted stock forfeited	(134)	—		25	54		(54)		—		—		—
Stock compensation expense	—	—		—	—		969		—		—		969
Shares withheld to cover taxes	—	—		56	(77)		(19)		—		—		(96)


Balance, June 30, 2021	79,607	$	8	5,628	$	(34,017)	$	361,424	$	13	$	(293,534)	$	33,894


Six months ended June 30, 2021
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2020	78,669	$	8	5,581	$	(33,851)	$	359,721	$	(19)	$	(278,688)	$	47,171
Net loss	—	—		—	—		—		—		(14,846)		(14,846)
Foreign currency translation adjustment	—	—		—	—		—		32		—		32

Stock issued under employee stock purchase plan	—	—		(84)	(130)		(47)		—		—		(177)



Restricted stock granted	1,684	—		—	—		—		—		—		—
Restricted stock forfeited	(133)	—		30	64		—		—		—		64

Stock compensation expense	—	—		—	—		1,750		—		—		1,750
Shares withheld to cover taxes	—	—		101	(100)		—		—		—		(100)




Other (see Note 13, “Stockholders’ Equity”)	(613)	—		—	—		—		—		—		—
Balance, June 30, 2021	79,607	$	8	5,628	$	(34,017)	$	361,424	$	13	$	(293,534)	$	33,894

Three months ended June 30, 2020
Common Stock Treasury Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated Deficit Total Stockholders’ Equity
Shares
Issued Par
Value Shares Cost
Balance, March 31, 2020 64,338 $ 6 4,395 $ (33,529) $ 348,375 $ 58 $ (206,205) $ 108,705
Net loss — — — — — — (9,561) (9,561)
Foreign currency translation adjustment — — — — — (7) — (7)
Stock issued under employee stock purchase plan — — (12) — 9 — — 9
Restricted stock granted 1,788 — — — — — — —
Restricted stock forfeited — — 37 — — — — —
Treasury stock purchased — — 39 (37) — — — (37)
Stock compensation expense — — — — 1,059 — — 1,059
Stock issued in JP3 acquisition 11,500 1 — — 8,537 — — 8,538
Balance, June 30, 2020 77,626 7 4,459 (33,566) 357,980 51 (215,766) 108,706

Six months ended June 30, 2020
Common Stock Treasury Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Retained Earnings (Accumulated Deficit) Total Stockholders’ Equity
Shares
Issued Par
Value Shares Cost
Balance, December 31, 2019 63,657 $ 6 4,145 $ (33,484) $ 347,564 $ 181 $ (142,238) $ 172,029
Net loss — — — — — — (73,528) (73,528)
Foreign currency translation adjustment — — — — — (130) — (130)
Stock issued under employee stock purchase plan — — (25) — 20 — — 20
Restricted stock granted 2,469 — — — 338 — — 338
Restricted stock forfeited — — 278 — — — — —
Treasury stock purchased — — 61 (82) — — — (82)
Stock compensation expense — — — — 1,521 — — 1,521
Stock issued in JP3 acquisition 11,500 1 — — 8,537 — — 8,538
Balance, June 30, 2020 77,626 $ 7 4,459 $ (33,566) $ 357,980 $ 51 $ (215,766) $ 108,706

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and ~~Significant Accounting Policies~~

~~Organization and~~ Nature of Operations

General

The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers and cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.

The Company’s Data Analytics (“DA”) segment ~~enables~~aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with ~~the~~their hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their ~~profitability, reducing their carbon footprint, energy consumption and emissions.~~profitability.

~~The Company formed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”).~~ The Company’s 2 operating segments, CT and DA, are both supported by its ~~continuing~~ Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note ~~18,~~17, “Business Segment, Geographic and Major Customer Information.” ~~For further discussion~~

Sources and Uses of ~~the JP3 acquisition, see Note 3, “Business Combination.”~~Liquidity

The Company ~~was initially incorporated under the laws~~currently funds its operations and growth primarily from cash on hand. The ability of the ~~Province~~Company to grow and be competitive in the marketplace is dependent on the availability of ~~British Columbia~~adequate capital. The availability of adequate capital is dependent on the Company’s operating cash flow, and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in ~~1985. In October 2001,~~the twelve months subsequent to the date of filing the consolidated financial statements. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months, uncertainty surrounding the stability and strength of the oil and gas markets or reduced spending by our customers could have a further negative impact on our liquidity.

On February 2, 2022, the Company ~~changed its corporate domicile~~completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million (see Note 9, “Debt and Convertible Notes Payable”).

Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the ~~State~~greater of ~~Delaware.~~(a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022. These Contract Consideration Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $19.5 million in cash (see Note 13, “Stockholders’ Equity”). The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $0.0001 per share.

On April 18, 2022, the Company sold its Waller facility for $4.3 million of gross proceeds.

Based on our cash and liquid assets, including the transactions during the six months ended June 30, 2022 we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months. However, the Company cannot guarantee a sufficient level of cash flows in the future. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements reflect all adjustments, in the opinion of management, necessary for fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the SEC regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2021 Annual Report. A copy of the ~~2020~~2021 Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The information contained on the Company’s website does not form a part of this Quarterly Report.

~~During the first quarter of 2021, the Company classified its warehouse facility in Monahans, Texas, as held for sale based on the criteria outlined inAccounting Standard Codification (“ASC”) 360, Property, Plant and Equipment~~. During the first quarter, the Company committed to a plan to sell the asset in its present condition. The Company engaged with a commercial real estate agent and is actively looking for a buyer. As such, the Company reclassified the related property, plant and equipment of $0.5 million as held for sale in the current assets of the consolidated balance sheet, as the Company expects to complete the asset sale within one year.

All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.

Cash Equivalents

Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.

Restricted Cash

The ~~consolidated financial statements have been prepared assuming~~Company’s restricted cash is $40 thousand and $1.8 million as of June 30, 2022 and December 31, 2021, respectively.The Company’s restricted cash as of June 30, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $1.75 million for amounts due under the terms of the legal settlement discussed in Note 12, “Commitments and Contingencies”.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will ~~continue~~not be collected and records the appropriate allowance for doubtful accounts as a ~~going concern.~~

~~Impact of COVID-19~~

~~In March 2020, the World Health Organization declared the outbreak~~charge to operating expenses. The allowance for doubtful accounts is based on a combination of the ~~novel coronavirus (“COVID-19”)~~age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a ~~global pandemic.~~ reduction to the allowance for doubtful accounts charged to operating expense.

The ~~pandemic negatively impacted~~majority of the U.S. and global economy, disrupted domestic and international oil and gas markets, and increased volatility in financial markets. These effects materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. The Company’s ~~primary markets~~customers are engaged in the ~~U.S.~~energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are ~~particularly~~located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the ~~impacts on the oil and gas industry. In the first quarter~~collectability of 2020, the Company recorded impairments to property, plant and equipment; intangible assets; and operating right-of-use assets. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assets as well as an increase to the provision of excess and obsolete inventory.receivables.

Contract Assets

1011

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the Company and could result in additional impairmentsCompany’s contract assets represent consideration issued in the ~~future. Future developments~~form of ~~the COVID-19 crisis are uncertain and~~convertible notes to a related ~~implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.~~

The Company continues to monitor the impact of COVID-19 on the business, suppliers and customers. Future developments and effects are highly uncertain and cannot be predicted, including the scope and duration of the pandemic. This uncertainty could have a material impact on accounting estimates and assumptions usedparty customer in ~~our consolidated financial statements.~~

~~Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria. In~~ connection with the ~~CARES Act,~~ProFrac Agreement and the Amended ProFrac Agreement discussed in Note 9, “Debt and Convertible Notes Payable” and other incremental costs related to obtaining the ProFrac Agreements. The contract assets are amortized over the term of the ProFrac Agreements based on forecasted revenues as goods are transferred to the customer and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations. The contract assets will be tested for recoverability and the Company ~~adopted a policy~~will recognize an impairment loss to ~~recognize~~ the ~~employee retention credit when earned and to offset~~extent that the credit against the related payroll tax liability. Accordingly, the Company recorded a $1.9 million employee retention credit during the three months ended June 30, 2021 in other current assets with the offset recorded in accrued liabilities. In the second quarter of 2021, the Company used $0.8 millioncarrying amount of the ~~total employee retention credit leaving a $1.1 million credit to be applied against future payroll tax liabilities.~~

~~Sources and Uses of Liquidity~~

~~The Company currently funds its operations and growth primarily from cash on hand. The ability of~~contract assets exceeds the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s operating cash flows, the monetization of excess and non-core assets, and the availability of and access to debt and equity financing. The Company has a history of losses and negative operating cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.

Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet its capital requirements or satisfy the anticipated obligations as they become due,consideration the Company expects to ~~take further action~~receive in the future for the transfer of goods under the ProFrac Agreements less the direct costs that relate to ~~protect~~providing those goods in the future.

Inventories

Inventories consist of raw materials and finished goods and are stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its ~~liquidity position. Such actions~~net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of goods sold.

Property and equipment

Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including right-of-use assets (“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:


Buildings and leasehold improvements			2-30 years
Machinery and equipment			7-10 years
Furniture and fixtures			3 years
Land improvements			20 years
Transportation equipment			2-5 years
Computer equipment and software			3-7 years

Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.

Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable

The Company accounts for the Convertible Notes Payable issued to the PIPE investors for cash proceeds, which is discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.

The Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration for the ProFrac Agreement, which are discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

Fair Value Measurements

The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 10, “Fair Value Measurements.”

Revenue Recognition

The Company recognizes revenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.

The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.

Products and services are sold with fixed or determinable prices. Certain sales include ~~but~~right of return provisions, which are ~~not limited to:~~considered when recognizing revenue and deferred accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.

The Company applies several practical expedients including:

•~~Sale of non-core real estate properties;~~Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.

•~~Sale-leaseback transactions~~The majority of ~~facilities;~~the Company’s services are short-term in nature with a contract term of one year or less. As a result the Company does not disclose the transaction price allocated to remaining performance obligations.

•~~Sale~~The Company’s payment terms are short-term in nature with settlements of ~~excess inventory and/~~one year or ~~raw materials;~~less. As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

•~~Entry into~~In most service contracts, the Company has the right to consideration from a ~~borrowing facility~~customer in an amount that corresponds directly with ~~one or more lenders;~~the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.

•~~Reducing executive salaries and/or board~~The Company excludes from the measurement of ~~directors’ fees, or making~~the transaction price all taxes assessed by a ~~portion of those fees or salaries~~governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in ~~equity instead of cash;~~accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.

•
~~Reducing professional advisory fees~~

Shipping and ~~headcount;~~handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold on our consolidated statement of operations.

Foreign Currency Translation

Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.

Comprehensive Income (Loss)

Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes consolidated net income (loss) and foreign currency translation adjustments.

Research and Development Costs

Expenditures for research activities relating to product development and improvement are charged to expense as incurred.

Income Taxes

•
~~Raising equity either~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the ~~public markets~~results of operations in the period that includes the enactment date.

A valuation allowance is established when it is more likely than not that some portion or ~~via~~all of the deferred tax assets will not be realized. The establishment of a ~~private placement offering.~~valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

~~However,~~The Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense.

Stock-Based Compensation

Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.

Stock Warrants

The Company evaluated the Pre-funded Warrants in accordance with ~~respect~~ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to ~~anticipated transactions, there can~~ be ~~no assurance that such matters can be implemented on acceptable terms or at all.~~classified within stockholders’ equity, and recorded the proceeds received for the Pre-funded Warrants within additional paid in capital in the consolidated balance sheets.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.

Significant items subject to estimates and assumptions include the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense; valuation allowances for accounts receivable, inventories, and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified Stock Warrants.

Reclassifications

Certain prior ~~period~~year amounts in the unaudited condensed consolidated statement of operations have been reclassified to conform to the current ~~period~~year presentation. In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross loss and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices. In connection with this change in presentation, the Company reclassified selling costs of $1.3 million and $3.1 million to selling, general and administrative expenses which were previously reported in operating expenses for the three and six months ended June 30, 2021 respectively. The reclassifications and change in presentation of the statements of operations did not impact previously ~~reported~~recorded income (loss) from operations, net ~~loss and~~income (loss) or stockholders’ equity.

1114

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Note 2 —~~ Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the ~~Financial Accounting Standards Board (“FASB”).~~FASB. We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.

New Accounting Standards Issued ~~But Not~~and Adopted as of ~~June 30, 2021~~January 1, 2022

The FASB issued ASU No. ~~2019-12,~~2020-06, “~~Income Taxes (Topic 740): Simplifying the~~ Accounting for ~~Income Taxes~~Convertible Instruments and Contracts in an Entity’s Own Equity..” This standard ~~removes specific exceptions~~changes the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to be classified in equity and amends diluted earnings per share calculations for certain convertible debt instruments. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, with early adoption allowed for fiscal years beginning after December 15, 2020. The Company has adopted this standard as of January 1, 2022, and the ~~general principles~~adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures as of January 1, 2022 as there were no convertible debt instruments outstanding as of that date but will have an impact on the future issuances of convertible instruments and contracts in the Company’s equity.

~~Topic 740.~~

The FASB issued ASU No. 2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The pronouncement is effective for fiscal years beginning after December 15, ~~2021, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued. The~~2021.The Company ~~has evaluated the impact of~~adopted this standard as of January 1, 2022 and ~~determined that there is no~~the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

New Accounting Standards Issued But Not Adopted as of June 30, 2022

The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.

Note 3 — ~~Business Acquisition~~

During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The transaction was valued at approximately $36.6 million as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million. Additionally, the Company was subject to contingent consideration with an estimated fair value of $1.2 million at acquisition date for 2 potential earn-out provisions totaling $5.0 million based on certain stock performance targets. The first and second earn-out provisions occur if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025. See Note 11, “Fair Value Measurements,” for additional information on the current estimated fair value of the contingent consideration.

~~The following table summarizes the fair value of JP3’s assets acquired as of the closing date of May 18, 2020 (in thousands):~~


~~Tradenames and trademarks~~	$	~~1,100~~
~~Technology and know-how~~	~~5,000~~
~~Customer lists~~	~~6,800~~
~~Inventories~~	~~7,100~~
~~Cash~~	~~604~~
~~Net working capital, net of cash and inventories~~	~~(1,063)~~
~~Fixed assets~~	~~426~~
~~Long-term debt assumed and other assets (liabilities)~~	~~(893)~~
~~Goodwill~~	~~17,522~~
~~Net assets acquired~~	$	~~36,596~~

~~Note 4 —~~ Revenue from Contracts with Customers

Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to ~~receive. Revenue accruals are recorded on an ongoing basis~~receive and discounts offered to ~~reflect updated variable consideration information.~~customers for prompt payment.

The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized on an over ~~time.~~time basis. The Company bills sales on a monthly basis with payment terms customarily ~~30-45~~30-60 days for domestic and 6090-120 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.

Disaggregation of Revenue

The Company differentiates revenue based on whether the source of revenue is attributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition). ~~Product sales accounted for over~~

~~90%~~
~~of total revenue for the three and six months ended June 30, 2021 and 2020.~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenue disaggregated by revenue source is as follows (in thousands):


		Three months ended June 30,				Six months ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue:	Revenue:									Revenue:
Products(1)	Products(1)	$	8,444	$	8,176	$	19,524	$	26,976	Products(1)	$	28,588	$	8,444	$	40,787	$	19,524

Services	Services	721		704		1,411		1,320		Services	785		721		1,465		1,411
		$	9,165	$	8,880	$	20,935	$	28,296		$	29,373	$	9,165	$	42,252	$	20,935

(1) Product revenues for 2022 include sales to a related party as described in Note 16, “Related Party Transactions.”

Arrangements with Multiple Performance Obligations

The ~~CT and DA segments~~Company primarily ~~sell~~sells chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, ~~both segments offer~~the Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions. ~~Service revenue is recognized on an over time basis for CT as services are performed as the customer is simultaneously benefiting as the Company performs. For DA, services~~Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. ~~DA has~~There may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, DAthe Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements and revenue not yet recognizable is reported under current and long term contract liabilities on the balance sheet. Subscription-type arrangements were not a material revenue stream in the three and six months ended June 30, ~~2021~~2022 and ~~2020.~~

~~Contract Balances~~2021.

Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract ~~liabilities~~assets associated with incomplete performance obligations are not material.

~~Note 5 — Inventories~~

~~Inventories are as follows (in thousands):~~

June 30, 2021 December 31, 2020
Raw materials $ 7,203 $ 7,190
Finished goods 16,198 15,705
Inventories 23,401 22,895
Less reserve for excess and obsolete inventory (11,902) (11,058)
Inventories, net $ 11,499 $ 11,837

The provision recorded in the three and six months ended June 30, 2021 were $0.1 million for the CT segment and $0.1 million for the DA segment and $0.4 million for the CT segment and $0.1 million of the DA segment, respectively. The increase in excess and obsolescence is attributable to the Company’s continued product rationalization efforts, which included a reduction

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

in the number of materials carried within the portfolio and identification of those materials for which the Company will no longer actively market or carry quantities in excess of current and estimated future usage requirements.

Note ~~6 — Property and Equipment~~

~~Property and equipment are as follows (in thousands):~~
June 30, 2021 December 31, 2020
Land $ 1,986 $ 2,415
Land improvements 861 867
Buildings and leasehold improvements 6,367 6,364
Machinery and equipment 7,782 7,760
Furniture and fixtures 651 649
Transportation equipment 1,045 1,190
Computer equipment and software 1,304 1,296
Property and equipment 19,996 20,541
Less accumulated depreciation (11,979) (11,454)
Property and equipment, net $ 8,017 $ 9,087

Depreciation expense totaled $0.3 million and $0.5 million for the three months ended June 30, 2021 and 2020, and $0.3 million and $2.0 million for the six months ended June 30, 2021 and 2020, respectively.

During the first quarter of 2020, the Company recognized an impairment of property and equipment of $30.2 million. See Note 8, “Impairment of Fixed and Long-lived Assets.” NaN impairment was recognized for the three and six months ended June 30, 2021.

~~Note 7 — Leases~~

~~During the first quarter of 2020,~~ ~~the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the~~ ~~Global Research and Innovation Center (“GRIC”)~~ during the second quarter of 2020. In addition, the lease liability and corresponding right-of-use (“ROU”) assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustments to lease liabilities and ROU assets totaling of $6.2 million each as of March 31, 2020. During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office and moved all employees to the GRIC facility effective June 29, 2020.

In addition, during the three months ended March 31, 2020, the Company recorded an impairment of the ROU assets totaling $7.4 million. For further discussion, refer to Note 8, “Impairment of Fixed and Long-lived Assets.” NaN impairment was recognized for the three and six months ended June 30, 2021.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The components of lease expense and supplemental cash flow information are as follows (in thousands):~~

Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Operating lease expense $ 250 $ 283 $ 488 $ 854
Finance lease expense:
Amortization of right-of-use assets 4 4 7 9
Interest on lease liabilities 3 5 6 9
Total finance lease expense 7 9 13 18
Short-term lease expense 61 54 55 86
Total lease expense $ 318 $ 346 $ 556 $ 958
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 394 $ 1,411 $ 727 $ 1,024
Operating cash flows from finance leases 43 5 53 9
Financing cash flows from finance leases 3 14 29 51

~~Maturities of lease liabilities are as follows (in thousands):~~

Years ending December 31, Operating Leases Finance Leases
2021 (excluding the six months ended June 30, 2021) $ 581 $ 35
2022 1,256 47
2023 1,321 39
2024 1,351 25
2025 1,378 0
Thereafter 6,891 0
Total lease payments $ 12,778 $ 146
Less: Interest (4,178) (19)
Present value of lease liabilities $ 8,600 $ 127

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Supplemental balance sheet information related to leases is as follows (in thousands):~~

June 30, 2021 December 31, 2020
Operating Leases
Operating lease right-of-use assets $ 2,162 $ 2,320
Current portion of operating lease liabilities $ 589 $ 636
Long-term operating lease liabilities 8,011 8,348
Total operating lease liabilities $ 8,600 $ 8,984
Finance Leases
Property and equipment $ 147 $ 147
Accumulated depreciation (33) (26)
Property and equipment, net $ 114 $ 121
Current portion of finance lease liabilities $ 55 $ 60
Long-term finance lease liabilities 72 96
Total finance lease liabilities $ 127 $ 156
Weighted Average Remaining Lease Term
Operating leases 9.3 years 9.9 years
Finance leases 3.1 years 3.1 years
Weighted Average Discount Rate
Operating leases 4.5 % 8.9 %
Finance leases 8.5 % 9.0 %

~~Note 8 — Impairment of Fixed and Long-lived~~4 - Contract Assets

During the first quarter of 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the energy industry, which began to negatively impact the Company’s results of operations. The decline of results of operations were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to COVID-19. Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.

~~The impairment loss of fixed and intangible~~Contract assets ~~as of March 31, 2020 was recorded~~are as follows (in thousands):

~~March,~~June 30, 2022

December 31, ~~2020~~2021

Contract assets

83,060

—

~~Property and equipment, net~~Less accumulated amortization

(737)

—

Contract assets, (net)

82,323

~~30,178~~—

~~Operating lease right-of-use assets~~

~~7,434~~

~~Other Intangibles:~~

~~Patents and technology~~

~~9,902~~

~~Customer relationships~~

~~9,165~~

~~Intangible assets in progress~~

~~596~~

~~Trademarks and brand names~~

~~179~~

~~Total other intangibles~~

~~19,842~~

~~Total impairment of fixed, long-lived and intangible assets~~

~~57,454~~

In connection with entering into the ProFrac Agreements on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable”, we recognized contract assets of $10 million and $69.5 million, respectively, and associated fees of $3.6 million, representing the excess consideration to be given over the three and ten year terms of the contracts over the fair value of the convertible notes we issued. The value to be assigned to the contract asset was estimated based on forecasted volumes and contractual pricing in the agreements. As of June 30, 2022, $76.1 million of the contract assets is classified as long term based upon our estimate of the forecasted revenues from the ProFrac agreements which will not be realized within the first twelve months of the ProFrac Agreements. The Company’s estimate of the timing of the future contract revenues is evaluated on a quarterly basis throughout the contract term.

During the three and six months ended June 30, 2022. the Company recognized $0.7 million of contract assets amortization which is presented as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations. The below table reflects our estimated amortization per year (in thousands) based on our current forecasted revenues from the ProFrac Agreements.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Using~~


Years ending December 31,	Amortization
2022 (excluding the six months ended June 30, 2022)	$	2,655
2023	7,922
2024	8,696
2025	8,696
2026	8,696
Thereafter through May 2032	45,658
Total contract assets	$	82,323

Note 5 — Inventories

Inventories are as follows (in thousands):



	June 30, 2022		December 31, 2021
Raw materials	$	7,807	$	5,610
Finished goods	15,124		13,985
Inventories	22,931		19,595
Less reserve for excess and obsolete inventory	(9,682)		(10,141)
Inventories, net	$	13,249	$	9,454

The provision recorded in the ~~income approach,~~three months ended June 30, 2022 and 2021 was $0.4 million and $0.1 million for the ~~fair value~~CT segment and $49 thousand and $0.1 million for the DA segment, respectively. The provision recorded in the six months ended June 30, 2022 and 2021 was $0.7 million and $0.4 million for the CT segment and $49 thousand and $0.1 million for the DA segment, respectively.

Note 6 — Property and Equipment

Property and equipment are as follows (in thousands):



	June 30, 2022		December 31, 2021
Land	$	886	$	886
Land improvements	520		520
Buildings and leasehold improvements	5,356		5,473
Machinery and equipment	6,686		6,843
Furniture and fixtures	545		620
Transportation equipment	878		878
Computer equipment and software	1,175		1,176
Property and equipment	16,046		16,396
Less accumulated depreciation	(11,227)		(11,100)
Property and equipment, net	$	4,819	$	5,296

Depreciation expense totaled $0.2 million and $0.3 million for the three months ended June 30, 2022 and 2021, and $0.4 million and $0.6 million for the six months ended June 30, 2022 and 2021, respectively.

In the first quarter of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment,2021, the Company ~~concluded the carrying value of the asset group exceeded~~committed to plans to sell its ~~fair value as of March 31, 2020,~~warehouse facility in Monahans, Texas in its current condition and ~~an impairment loss of $57.5 million was recorded~~ as a result of the ~~adverse effect of~~associated assets in the COVID-19 pandemic, estimated effect on the economy, and the related negative impact on oil and natural gas prices on projections of future cash flows. Prior to the impairment, the Company recognized amortization expense for finite-lived intangible assets acquiredamount of $0.5 million are classified as held for sale as of June 30, 2022 and December 31, 2021. The company also classified $2.3 million for the Waller facility as held for sale as of December 2021, which was sold on April 18, 2022 (See Note 1, “Organization and Nature of Operations”.

Note 7 — Leases

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $40 thousand per month for sixty-four months. Rental income recognized during the three and six months ended ~~March 31, 2020.~~June 30, 2022 was nil and $121 thousand, respectively, and was included in other income in the consolidated statement of operations. As discussed in Note 1, “Organization and Nature of Operations” this facility was sold on April 18, 2022 and the lease agreement between the tenant and the Company terminated.

In August 2021, the Company entered into a five-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for $20 thousand per month, and the tenant occupied the warehouse facility in September 2021. Rental income recognized during the three and six months ended June 30, 2022 was $66 thousand, and $131 thousand, respectively and was included in other income in the consolidated statement of operations.

The components of lease expense and supplemental cash flow information are as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Operating lease expense	$	220	$	250	$	448	$	488
Finance lease expense:
Amortization of right-of-use assets	4		4		8		7
Interest on lease liabilities	3		3		6		6
Total finance lease expense	7		7		14		13
Short-term lease expense	79		61		203		134



Total lease expense	$	306	$	318	$	665	$	635

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	$	350	$	394	$	726	$	727
Operating cash flows from finance leases	10		43		20		53
Financing cash flows from finance leases	3		3		6		29

Maturities of lease liabilities as of June 30, 2022 are as follows (in thousands):


Years ending December 31,	Operating Leases		Finance Leases
2022 (excluding the six months ended June 30, 2022)	$	519	$	19
2023	1,221		39
2024	1,247		21
2025	1,274		—
2026	1,302		—
Thereafter	4,782		—
Total lease payments	$	10,345	$	79
Less: Interest	(3,014)		(7)
Present value of lease liabilities	$	7,331	$	72

~~The Company concluded no triggering events during the first and second quarters of 2021.~~

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Supplemental balance sheet information related to leases is as follows (in thousands):


	June 30, 2022			December 31, 2021
Operating Leases
Operating lease right-of-use assets	$	1,771		$	2,041

Current portion of operating lease liabilities	636			602
Long-term operating lease liabilities	6,695			7,779
Total operating lease liabilities	$	7,331		$	8,381

Finance Leases
Property and equipment	$	147		$	147
Accumulated depreciation	(40)			(33)
Property and equipment, net	$	107		$	114

Current portion of finance lease liabilities	$	34		$	41
Long-term finance lease liabilities	38			53
Total finance lease liabilities	$	72		$	94

Weighted Average Remaining Lease Term
Operating leases	9.4 years			9.1 years
Finance leases	3.1 years			2.9 years

Weighted Average Discount Rate
Operating leases	8.9		%	8.9		%
Finance leases	8.9		%	8.9		%

Note 98 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):
June 30, 2021 December 31, 2020
Loss on purchase commitments (Note 13) $ 9,383 $ 9,402
Severance costs 3,419 3,558
Payroll and benefits 994 1,789
Contingent liability for earn-out provision 1,115 1,416
Taxes other than income taxes 633 544
Due to third parties 504 434
Legal costs 721 333
Deferred revenue, current 152 146
Other 300 653
Total current accrued liabilities $ 17,221 $ 18,275



	June 30, 2022		December 31, 2021
Severance costs	$	2,595	$	2,581
Loss on purchase commitments	—		1,750
Payroll and benefits	998		1,054
Legal costs	1,108		1,013
Contingent liability for earn-out provision	474		608
Deferred revenue, current	368		528
Taxes other than income taxes	852		241
Other	720		1,221
Total current accrued liabilities	$	7,115	$	8,996

Note 109 — Debt and Convertible Notes Payable

Long Term Debt

In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the ~~Payroll~~Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April ~~2020.~~2020 prior to its acquisition by Flotek. The PPP loans ~~have~~had a fixed interest rate of 1% and ~~have~~originally a two-year term, maturing in ~~2022.~~ April and May 2022, respectively. No payments of principal or interest were required during the ~~year ended December 31, 2020,~~three or ~~the~~ six months ended June 30, 2022 and 2021.

A portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60% of the eligible costs incurred ~~are~~were used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that iswas not significantly detrimental to the business.~~During the second quarter, the Company applied for forgiveness on the PPP loans.~~ The ~~receipt of these funds, and the~~ forgiveness of the loans ~~attendant to these funds,~~ is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our past and future adherence to the forgiveness criteria. The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.

During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest ~~was~~were fully forgiven. ~~During~~Accordingly, during the second quarter of 2021, the Company recorded $0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statement of operations.

In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025.

The Company has submitted to the ~~SBA~~SBA for ~~partial~~ forgiveness onof substantially all of the Flotek PPP loan but as of the date of this filing, ~~no conclusion~~the Company has ~~been reached. The~~not received a forgiveness notice. If the loan is not forgiven, monthly payments will be due over the remaining term of the loan upon notice that it will not be forgiven. Denial of the forgiveness of the Flotek PPP loan ~~is classified~~will negatively impact the Company’s liquidity as discussed in Note 1, “Organization and Nature of Operations”.

Long-term debt, including current portion, assuming forgiveness is not obtained, is as follows (in thousands):


	June 30, 2022		December 31, 2021
Flotek PPP loan	$	4,788	$	4,788
Less current maturities	(1,690)		(1,436)
Total long-term debt, net of current portion	$	3,098	$	3,352

Convertible Notes Payable

On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of ~~long term debt as~~investors to secure growth capital for the Company. Pursuant to the PIPE transaction, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $19.5 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum, have a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $0.8705. On March 21, 2022, $3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock.

As of June 30, ~~2021 on~~2022, the ~~consolidated balance sheet.~~remaining Convertible Notes Payable are recorded at carrying value of $18.3 million, including accrued paid-in-kind interest of $0.8 million, and net of unamortized issuance costs of $0.6 million The estimated fair value of the Convertible Notes Payable at June 30, 2022 was $21.1 million.

ProFrac Agreement Contract Consideration Convertible Notes Payable

1720

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

~~Long-term debt, including current portion, is~~On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as ~~follows (in thousands):~~the Convertible Notes Payable issued in the PIPE transaction.

June 30, 2021 December 31, 2020
Long-term debt
Flotek PPP loan $ 0 $ 4,788
JP3 PPP loan 0 877
Total 0 5,665
Less current maturities 0 (4,048)
Total long-term debt, net of current portion $ 0 $ 1,617
The ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $10.0 million on the issuance date and remeasured to fair value of $11.7 million as of June 30, 2022 which includes payment-in-kind interest of $0.4 million. The fair value adjustment was a $2.4 million decrease and a $1.7 million increase in the three and six months ended June 30, 2022, respectively. See Note 10, “Fair Value Measurements”.

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable

On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”). The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable may be converted at any time prior to the maturity date, which will be one year from the date of issuance under the same stock conversion terms as the Convertible Notes Payable issued in the PIPE transaction.

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $69.5 million on the issuance date and remeasured to fair value of $55.6 million as of June 30, 2022 which includes payment-in-kind interest of $0.6 million. The fair value adjustment was a $13.9 million decrease in the three and six months ended June 30, 2022. See Note 10, “Fair Value Measurements”.

Note 1110 — Fair Value Measurements

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.

•Level 1 — Quoted prices in active markets for identical assets or liabilities;

•Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.

Fair Value of Other Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts. The carrying amount of the Flotek PPP loan ~~for Flotek approximate~~approximates its fair value ~~due to maturity in less than fifteen months.~~as of June 30, 2022 and December 31, 2021.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s ~~assets and~~ liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):

Balance at June 30, Balance at December 31,
Level 1 Level 2 Level 3 2021 Level 1 Level 2 Level 3 2020
Contingent consideration $ 0 $ 0 $ 1,115 $ 1,115 $ 0 $ 0 $ 1,416 $ 1,416


							June 30,								December 31,
	Level 1		Level 2		Level 3		2022		Level 1		Level 2		Level 3		2021
Contingent earnout consideration	$	—	$	—	$	474	$	474	$	—	$	—	$	608	$	608
ProFrac Agreement contract consideration convertible notes	$	—	$	—	11,670		$	11,670	$	—	$	—	$	—	$	—
Amended ProFrac Agreement contract consideration convertible notes	$	—	$	—	55,550		$	55,550	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	67,694	$	67,694	$	—	$	—	$	608	$	608

~~At June 30, 2021, and December 31, 2020, the~~Contingent Earnout Consideration Key Inputs

The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, ~~was recorded~~is included in accrued liabilities as ~~a contingent liability.~~of June 30, 2022 and December 31, 2021. The estimated fair value of the earn-out provision at the end of each period was valued using ~~the~~a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.~~There~~

The key inputs into the Monte Carlo simulation used to estimate the fair value the earn-out provision were ~~no transfers in or out~~as follows:


	June 30, 2022	December 31, 2021
Risk-free interest rate	2.99%	1.02%
Expected volatility	90.0%	90.0%
Term until liquidation (years)	2.88	3.38
Stock price	$0.99	$1.13
Discount rate	10.77%	6.71%

ProFrac Agreement Contract Consideration Notes Payable Key Inputs

The ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of ~~either Level 1,~~$10.0 million on February 2, 2022. The ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 orat the initial measurement due to the use of a quoted price for a similar liability, and classified as Level 3 as of June 30, 2022 due to the use of unobservable inputs. The estimated value of the ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.

The key inputs into the Monte Carlo simulation used to estimate the fair value ~~measurements during~~ the ~~periods ending~~ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of June 30, ~~2021~~2022 were as follows:

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


			June 30, 2022
Risk-free interest rate			2.51%
Expected volatility			90.0%
Term until liquidation (years)			0.60
Stock price			$0.99
Discount rate			10.92%

The valuation of the ProFrac Agreement Contract Consideration Convertible Notes Payable was $11.7 million as of June 30, 2022

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs

On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $69.5 million. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and ~~December 31, 2020.~~the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.

The key inputs into the Monte Carlo simulation used to estimate the fair value the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, on the issuance date of May 17, 2022, and as of as of June 30, 2022 were as follows:


	May 17, 2022	June 30, 2022
Risk-free interest rate	2.16%	2.80%
Expected volatility	90.0%	90.0%
Term until liquidation (years)	1.00	0.88
Stock price	$1.29	$0.99
Discount rate	8.40%	10.97%

The value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was $55.6 million.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, including property and equipment ~~goodwill~~ and ~~other intangible~~operating lease right-of-use assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the three months ended March 31, 2020, the Company recorded an impairment of $57.5 million for impairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis

In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During 2020, the first stock performance target for the contingent consideration was achieved and settled. The Company estimated the fair value of the remaining stock performance earn-out provision atas of June 30, 2022 and 2021 and ~~decreased~~adjusted the estimated fair value of the contingent liability to $0.5 million and $1.1 ~~million.~~million, respectively. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in ~~operating expenses.~~cost of goods sold.

The Company estimated the initial fair value of $10.0 million of the ProFrac Agreement Contract Consideration Convertible Notes Payable on February 2, 2022, by reference to the cash purchase price paid by third party investors for equivalent notes issued simultaneously by the Company. The Company estimated the fair value of the additional $69.5 million of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on the issuance date of May 17, 2022 using a Monte Carlo simulation. The Company adjusted the estimated fair value of the Contract Consideration Convertible Notes Payable to $55.6 million as of June 30, 2022.

The following table presents the changes in ~~contingent consideration balances~~the assets and liabilities measured at fair value on a recurring basis classified as Level 3 ~~balances for the three months ended June 30, 2021 and 2020~~ (in thousands):

Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Balance - beginning of period $ 1,081 $ 0 $ 1,416 $ 0
Additions / issuances 0 1,200 0 1,200
Change in fair value 34 0 (301) 0
Transfer out of Level 3 0 0 0 0
Balance - end of period $ 1,115 $ 1,200 $ 1,115 $ 1,200

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Balance - beginning of period	$	14,752	$	1,081	$	608	$	1,416
Transfer of ProFrac Agreement contract consideration convertible notes payable from Level 2	—		—		10,000		—
Issuance of Amended ProFrac Agreement contract consideration convertible notes payable	69,460		—		69,460		—
Increase in principle of ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	257		—		415		—
Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest	611		—		611		—
Change in fair value of contingent earnout consideration	(228)		34		(134)		(301)
Change in fair value of ProFrac Agreement contract consideration convertible notes payable	(2,637)		—		1,255		—
Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable	(14,521)		—		(14,521)		—


Balance - end of period	$	67,694	$	1,115	$	67,694	$	1,115

Note 1211 — Income Taxes

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:


		Three months ended June 30,				Six months ended June 30,					Three months ended June 30,				Six months ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
U.S. federal statutory tax rate	U.S. federal statutory tax rate	21.0	%	21.0	%	21.0	%	21.0	%	U.S. federal statutory tax rate	21	%	21	%	21	%	21	%
State income taxes, net of federal benefit	State income taxes, net of federal benefit	(0.3)		0.4		(0.2)		0		State income taxes, net of federal benefit	—		(0.3)		0.1		(0.2)
Non-U.S. income taxed at different rates	Non-U.S. income taxed at different rates	(0.1)		0.9		0.3		0.2		Non-U.S. income taxed at different rates	3.8		(0.1)		(1.9)		0.3

Increase (reduction) in tax benefit related to stock-based awards	Increase (reduction) in tax benefit related to stock-based awards	2.2		0.9		1.2		(0.1)		Increase (reduction) in tax benefit related to stock-based awards	3.1		2.2		(2.0)		1.2
Non-deductible expenses	Non-deductible expenses	3.6		0.7		1.1		0		Non-deductible expenses	(0.4)		3.6		0.1		1.1
Research and development credit		0		0.1		0		0
Increase in valuation allowance	Increase in valuation allowance	(26.5)		(23.7)		(23.6)		(16.0)		Increase in valuation allowance	(27.5)		(26.5)		(17.0)		(23.6)
Effect of tax rate differences of NOL carryback		0		0		0		2.6

Tax settlement										Tax settlement	3.8		—		(2.2)		—
Effective income tax rate	Effective income tax rate	(0.1)	%	0.3	%	(0.2)	%	7.7	%	Effective income tax rate	3.8	%	(0.1)	%	(1.9)	%	(0.2)	%

Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different ~~rates, except for the NOL carryback claim discussed above.~~rates.

Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. GAAP provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance, the Company considers all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income.

~~The Company continues to have a full valuation allowance against net deferred tax assets as it is not more-likely-than-not they will be utilized.~~

1924

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

Note 1312 — ~~Commitments~~Commitments and Contingencies

Litigation

The Company is subject to routine litigation and other claims that arise in the normal course of business. Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

Terpene Supply Agreement

On March 26, 2021, ~~the Company~~Flotek Industries, Inc. and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company ~~LLC~~ (“FCC”) and ~~Joshua A. Snively~~other parties in state court in Harris County, Texas. The lawsuit ~~claims~~claimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary ~~duty by Mr. Snively. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.~~duty.

~~Subsequent to the lawsuit described above, on~~On April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters.

~~The~~On October 29, 2021, the Company ~~is subject to other routine litigation and other~~reached agreement with all parties resolving all claims between the parties (“the ADM Settlement”) that ~~arise~~resulted in the ~~normal course~~termination of ~~business. Except~~the terpene supply agreement and a settlement payment of $1.75 million due from Flotek. The one-time payment of $1.75 million from Flotek to ADM was paid on January 3, 2022 and was included as ~~disclosed above,~~restricted cash on the consolidated balance sheet as of December 31, 2021.

Former CEO Matter

During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to review the findings of the investigation. After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management ~~is not aware~~were implicated in any way.

Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any ~~pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.~~

outcome cannot reasonably be predicted.

Other Commitments and Contingencies

~~Terpene Supply Agreement~~

At December 31, 2020, the Company’s balance sheet included an accrued liability of $9.4 million associated with the terpene supply agreement with FCC. The Company calculated the liability based on the Company’s expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased and expected selling prices of the excess terpene as such loss was not considered recoverable.

The Company’s balance sheet at June 30, 2021 included an accrued liability of $9.4 million as it did not make any payments for, or purchases of, terpene during the first and second quarters of 2021. The Company expects that settlement of the accrued liability, if any, will be determined through the litigation disclosed in the “Litigation” section of this Note.

~~Indemnification~~

~~The Company agreed to provide indemnification to National Oilwell DHT, L.P. for certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017.~~ ~~The total expenses in this matter are estimated at a range of $0.2 million to $0.5 million as of June 30, 2021.~~

~~Concentrations and Credit Risk~~

~~The majority of t~~he Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the surface cleaner and disinfectant industry. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk~~. See Note 18, “Business Segment, Geographic and Major Customer Information,” for concentration of segment revenue from major customers.~~

The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1413 — Stockholders’ Equity

On ~~May 5, 2020, the shareholders of~~June 21, 2022, the Company ~~approved an amendment~~issued the Prefunded Warrants to ~~the Company’s Amended~~ProFrac Holdings II, LLC in exchange for $11.1 million in cash (see Note 1, “Organization and ~~Restated Certificate~~Nature of ~~Incorporation, as previously amended,~~Operations”) and a cash equity contribution of $8.4 million, for a total cash infusion of $19.5 million.The Prefunded Warrants will permit ProFrac Holdings II, LLC to ~~increase the authorized~~purchase 13,104,839 shares of common stock ~~from 80,000,000~~of the Company at an exercise price equal to ~~140,000,000, par value~~ $0.0001 per share, representing a 20% premium to the 30-day volume average price of the Company’s common stock at the close of business on the day prior to the date of the issuance of the Prefunded Warrants. The Prefunded Warrants, net of transaction fees of $1.1 million, and ~~100,000~~the equity contribution from ProFrac are included in additional paid-in capital as of ~~preferred stock, par value $0.0001 per share.~~June 30, 2022.

ProFrac Holdings and its affiliates may not receive any voting or consent rights in respect of the Prefunded Warrants or the underlying shares unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings and its affiliates and (ii) ProFrac Holdings has paid an additional $4.5 million to the Company. The additional ~~authorized~~$4.5 million will be accounted for as equity contribution when received.

On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of accrued interest, were converted into 2,793,030 shares ~~are available for corporate purposes, including acquisitions.~~of the Company’s common stock.

During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the ~~December 31, 2020~~June 30, 2021 consolidated financial statements or basic and diluted earnings per share.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Note 15 14 — Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing the adjusted net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.

Potentially dilutive ~~securities were excluded from~~common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and convertible notes payable and settlement of restricted stock units. The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the prefunded stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022 (see Note 2, “Summary of Significant Accounting Policies”).

The calculation of the basic and diluted ~~loss per share~~EPS is as follows (in thousands):


	Three months ended June 30,		Six months ended June 30,
	2022			2022
Numerator:
Net income (loss) for basic earnings per share	$	6,240		$	(4,484)
Paid-in-Kind interest expense on convertible notes payable, net of tax	1,028			1,402
Change in fair value of contract consideration convertible notes payable , net of tax	(13,229)			(10,228)
Adjusted net (loss) for dilutive earnings per share	$	(5,961)		$	(13,310)

Denominator:
Basic weighted average shares outstanding	74,861			73,476
Dilutive effect of convertible notes payable	49,474			33,610
Diluted weighted average shares outstanding	124,335			107,086

Basic earnings (loss) per share	0.08			(0.06)
Diluted loss per share	(0.05)			(0.12)

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The adjustments to net income (loss) in the numerator are net of estimated tax at 22.9%. For the three and six months ended June 30, 2022 weighted average shares for employee stock awards of 692,494 and 662,230, respectively, and weighted average shares for the prefunded stock warrants of 976,177 and 490,785, respectively, were not included in the dilution calculation since including them would have an anti-dilutive effect.

For the three and six months ended June 30, 2021 weighted average shares for employee stock awards of 1,127,080 and ~~2020,~~1,344,233, respectively. were not included in the calculation of diluted loss per share since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.

Note 1615 — Supplemental Cash Flow Information

Supplemental cash flow information is as follows (in thousands):

Six months ended June 30,
2021 2020
Supplemental cash payment information:
Interest paid $ 11 $ 20
Income taxes (received, net of payments) paid (351) 149
Supplemental non-cash activities:
Employee retention credit $ 1,164 $ 0
JP3 PPP loan forgiveness 881 0
Supplemental non-cash investing and financing activities:
Equity issued - acquisition of JP3 $ 0 $ 8,538


	Six months ended June 30,
	2022		2021







Supplemental cash flow information:
Interest paid	$	7	$	11
Income taxes received	—		(351)
Supplemental non-cash activities:
Employee retention credit	—		1,164
JP3 PPP loan forgiveness	—		881
Non cash financing and investing activities:
Issuance of convertible notes payable as consideration for ProFrac Agreements	79,460		—
Conversion of convertible notes payable to common stock	2,949		—
Issuance cost of stock warrants included in accrued accounts payable	1,170		—

Note 17 16— Related Party Transaction

In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.

In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed by Mr. Chisholm to the Company for the IRS matter, and giving the Company the right to withhold payments to Mr. Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement. At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $1.8 million for potential liability to the IRS. On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. In September 2020, the Company informed Mr. Chisholm it would cease payment of future severance.

During first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the receivable from Mr. Chisholm was $1.4 million, which equaled the payable to the IRS and netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.

Mr. Ted D. Brown was a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company formed in 2016. As of April 15, 2022 Ted D. Brown stepped down from being a Director of the Company and Confluence will no longer be considered a related party.. For the three and six months ended June, 30, 2022, the Company’s revenues for chemical sales to Confluence was zero and $1.4 million respectively.

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FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) under which ProFrac Services, LLC is obligated to order chemicals as per the terms of the Agreement discussed in Note 181, “Organization and Nature of Operations”. On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement, (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) to increase the purchase obligation and term of the ProFrac Agreement, as discussed in Note 1, “Organization and Nature of Operations”. On June 21, 2022, the Company issued prefunded warrants (the “PreFunded Warrants”) to ProFrac Holdings II, LLC, in exchange for $19.5 million in cash as discussed in Note 13, “Stockholders’ Equity”.

During the three and six months ended June 30, 2022, the Company’s revenues from chemical sales to ProFrac Services LLC, were $16.5 million and $18.9 million respectively. These revenues were net of amortization of contract assets of $0.7 million for the three and six months ended June 30, 2022. As of June 30, 2022 and December 31, 2021, ProFrac Services, LLC owed $11.6 million and zero, respectively which is recorded in account receivables on the consolidated balance sheet.

Note 17 — Business Segment, Geographic and Major Customer Information

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: CT and DA.

Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their ~~ESG~~environmental, social and governance (“ESG) and operational goals. This segment also includes a portfolio of specialty chemical products to address the long-term challenges of in the janitorial, sanitization, food services, and adjacent markets. The Company designs, develops, manufactures, packages, distributes, delivers and markets optimized fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields, as well as to reduce health and environmental risk by utilization of greener chemicals. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.

In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. The Company produces Food and Drug Administration and Environmental Protection Agency compliant products its ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets.

Data Analytics. The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The ~~real-time information on~~company markets products and services that support in-line data analysis of hydrocarbon ~~composition~~components and properties helps customers generate additional profits by enhancing their operations including crude/condensates stabilization, blending, optimization of transmix, increasing efficiencies of gas processing plants, ensuring product quality while enabling automation of fluid handling and reducing losses through give-aways (i.e., that portion of a product of higher value than what is specified). The customersproperties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution ~~networks.~~networks

~~The Company evaluates performance~~

Performance based upon a variety of criteria. The primary financial measure is segment operating ~~income.~~income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.

2228

FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

Summarized financial information of the reportable segments is as follows (in thousands):
For the three months ended June 30, Chemistry Technologies
Data Analytics (1)
Corporate and Other Total
2021
Net revenue from external customers $ 7,688 $ 1,477 $ 0 $ 9,165
Loss from operations, including impairment (3,819) (773) (2,869) (7,461)
Depreciation and amortization 233 20 0 253
Additions to long-lived assets 13 0 0 13
2020
Net revenue from external customers $ 7,962 $ 918 $ 0 $ 8,880
Loss from operations, including impairment (3,596) (1,151) (5,484) (10,231)
Depreciation and amortization 246 131 91 468
Additions to long-lived assets 0 0 0 0

~~(1)~~ ~~The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3.~~

For the six months ended June 30, Chemistry Technologies
Data Analytics (1)
Corporate and Other Total
2021
Net revenue from external customers $ 17,990 $ 2,945 $ 0 $ 20,935
Loss from operations, including impairment (7,407) (1,067) (7,230) $ (15,704)
Depreciation and amortization 524 35 1 $ 560
Additions to long-lived assets 31 0 0 $ 31
2020
Net revenue from external customers $ 27,378 $ 918 $ 0 $ 28,296
Loss from operations, including impairment (66,257) (1,151) (12,908) (80,316)
Depreciation and amortization 2,056 131 472 2,659
Additions to long-lived assets 42 0 0 42


As of and for the three months ended June 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2022
Revenue from external customers	$	12,111	$	713	$	—	$	12,824
Revenue from related party	16,549		—		—		16,549
Change in fair value of contract consideration convertible notes	(17,158)		—		—		(17,158)
Income (loss) from operations	14,944		(1,198)		(5,707)		8,039
Depreciation and amortization	166		15		1		182
Additions to long-lived assets	5		—		—		5

2021
Revenue from external customers	$	7,688	$	1,477	$	—	$	9,165
Revenue from related party	—		—		—		—
Income (loss) from operations	(3,819)		(773)		(2,869)		(7,461)
Depreciation and amortization	233		20		—		253
Additions to long-lived assets	13		—		—		13

~~(1)~~ ~~The Company formed the Data Analytics segment in the second quarter of 2020 upon acquiring JP3.~~


As of and for the six months ended June 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2022
Revenue from external customers	$	21,422	$	1,784	$	—	$	23,206
Revenue from related party	19,046		—		—		19,046
Change in fair value of contract consideration convertible notes	(13,266)		—		—		(13,266)
Income (loss) from operations	8,887		(2,006)		(9,126)		(2,245)
Depreciation and amortization	345		31		1		377
Additions to long-lived assets	5		—		—		5

2021
Revenue from external customers	$	17,990	$	2,945	$	—	$	20,935
Revenue from related party	—		—		—		—
Income (loss) from operations	(7,407)		(1,067)		(7,230)		(15,704)
Depreciation and amortization	524		35		1		560
Additions to long-lived assets	31		—		—		31

Assets of the Company by reportable segments are as follows (in thousands):


		June 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
Chemistry Technologies	Chemistry Technologies	$	41,950	$	43,346	Chemistry Technologies	$	127,398	$	34,387
Data Analytics	Data Analytics	5,154		13,201		Data Analytics	4,787		7,329
Corporate and Other	Corporate and Other	24,314		29,663		Corporate and Other	31,286		8,528
Total assets	Total assets	$	71,418	$	86,210	Total assets	$	163,471	$	50,244

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FLOTEK INDUSTRIES, INC.

NOTES TO ~~UNAUDITED CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

The increase in Chemistry Technologies assets is primarily due to contact assets of $83.3 million.

Geographic Information

Revenue by country is based on the location where services are provided and products are ~~used.~~sold. No individual countries other than the U.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):


		Three months ended June 30,				Six months ended June 30,					Three months ended June 30,				Six months ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
U.S.	U.S.	$	6,869	$	6,936	$	16,530	$	22,711	U.S.	$	25,955	$	6,869	$	36,289	$	16,530
UAE	UAE	1,319		847		2,422		2,308		UAE	3,139		1,319		4,450		2,422
Other countries	Other countries	977		1,097		1,983		3,277		Other countries	279		977		1,513		1,983
Total revenue	Total revenue	$	9,165	$	8,880	$	20,935	$	28,296	Total revenue	$	29,373	$	9,165	$	42,252	$	20,935

Long-lived assets held in countries other than the ~~U.S.are~~U.S. are not considered material to the consolidated financial statements.

Major Customers

Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands):

For the three months ended June 30, Chemistry Technologies % of Total Revenue Data Analytics % of Total Revenue
2021
Customer C $ 1,038 11.3 % * *
Customer D 1,810 19.8 % * *

2020
Customer A $ 2,004 22.6 %
* (1)
* (1)
Customer B 1,246 14.0 %
* (1)
* (1)


Three months ended June 30,	Revenue		% of Total Revenue
2022
Customer A (Related Party)	$	16,549	52.2	%
Customer B	5,611		19.1	%

2021
Customer C	$	1,038	11.3	%
Customer D	1,810		19.8	%

For the six months ended June 30, Chemistry Technologies % of Total Revenue Data Analytics % of Total Revenue
2021
Customer C $ 4,067 19.4 % * *
Customer D 4,660 22.3 % * *

2020
Customer C $ 8,324 29.4 %
* (1)
* (1)
Customer A 3,536 12.5 %
* (1)
* (1)
Customer D 3,485 12.3 %
* (1)
* (1)

* This customer did not account for more than 10% of revenue during this period.

*~~(1)~~ ~~Not applicable, as the Company did not form the Data Analytics segment until May 2020 upon acquiring JP3.~~

~~Note 19 — Subsequent Events~~

On July 27, 2021, the Company entered into a long-term rental agreement with Resolute Oil to leverage capabilities and facilities to drive growth in adjacent green chemistry markets. The agreement includes options to renew until 2036.


Six months ended June 30,	Revenue		% of Total Revenue
2022
Customer A (Related Party)	$	17,657	38.9	%
Customer B	8,218		19.5	%

2021
Customer C	$	4,067	19.4	%
Customer D	4,660		22.3	%

~~Through~~The majority of the Company’s revenue consists predominantly of customers within the ~~agreement, Resolute Oil will fully utilize~~oil and gas industry. Customers within the Company’s entire 15-acre campus, including the 38,000 square foot chemical blending facility, based in Waller, TX, to manufacture United States Pharmacopeia-National Formulary (USP-NF)-grade white mineral oil ~~distributed globally to customers~~and gas industry include ProFrac and other oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. The concentration with ProFrac and in the ~~agricultural, energy, food & beverage, cosmetic,~~oil and ~~personal care markets.~~

gas industry increases credit and business risk
.

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FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 — Subsequent Events

We have evaluated the effects of events that have occurred subsequent to June 30, 2022, and there have been no material events that would require recognition in the 2022 interim financial statements or disclosure in the notes to the consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Executive Summary~~

~~This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)~~The following discussion should be read in conjunction with the ~~unaudited condensed~~Annual Report on Form 10-K for year-end December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the consolidated financial statements and ~~the related~~accompanying notes ~~thereto of this Quarterly Report, as well as the Annual Report. Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc. and its subsidiaries.~~included herein.

Executive Summary

Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial, commercial, and consumer markets improve their ~~Environmental, Social, and Governance (ESG)~~ESG performance. The Company serves specialty chemistry needs ~~that span from downstream, midstream and upstream,~~for both domestic and international energy markets toas well as applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.

The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and supplying professional chemistries that cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.

The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. These real-time data and analytics prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance. During the second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.

The Company was impacted as a result of the outbreak of COVID-19 that spread throughout the U.S. and the world during 2020, with effects continuing into 2021. For a discussion of the impacts of COVID-19, see “COVID-19 Effects and Actions” and “Outlook” in this Quarterly Report.

~~Company Overview~~

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research &and Innovation ~~(“R&I”)~~ advanced laboratory capabilities.

Company Overview

Chemistry Technologies

The Company’s CT segment ~~includes energy-focused products~~provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and ~~services comprised of~~delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services ~~which~~ enable its customers to pursue improved efficiencies and performance throughout the life cycle ~~their wells, helping customers improve their ESG and operational goals.~~of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes ~~delivers~~ and markets optimized fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields, as well aschemistry solutions that accelerate existing sustainability practices to reduce ~~health~~the environmental impact of energy on the air, water, land and ~~environmental risk by using greener chemicals.~~people.

Customers of the CT segment include ~~major~~those of energy related markets as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and ~~international supply chain management companies.~~

~~In 2020, the Company leveraged historical expertise,~~advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for disinfectants, surface cleaners, degreasers and solvents for both commercial and personal use. The Company produces FDA and EPA compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today, the Company has a portfolio of specialty green chemical products designed to address the long-term challenges in the janitorial and sanitization (JanSan), food service and adjacent markets. The Company has made a commitment of being in this market for the long-term.sustainability practices.

Data Analytics

The DA segment ~~created in conjunction with the acquisition~~delivers real-time information and insights to our customers to enable optimization of ~~JP3 in May 2020, includes the design, development, production, sale~~operations and ~~support~~reduction of ~~equipment~~emissions and ~~services that create and provide valuable real time information on the~~

their carbon intensity. Real-time composition and physical properties ~~for customers' oil,~~are delivered simultaneously on their refined fuels, natural gas and refined products. The DA segment is transitioning to a recurring revenue subscription model of selling its application packages while continuing to sell its line of Verax analyzers, deployed in the field across theliquids (NGLs), natural gas, crude oil, and ~~gas sector.~~condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

~~The customers of the DA segment diversify the revenues of the Company and span across the entire oil and gas market,~~Customers using this technology have obtained significant benefits including ~~upstream, midstream, refineries and distribution networks. The segment helps its customers generate~~ additional ~~profit~~profits by enhancing ~~their~~ operations ~~including~~in crude/condensates stabilization, blending ~~optimization~~operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while ~~enabling automation of fluid handling and~~ reducing ~~losses through give-aways (i.e.~~giveaways i.e., ~~that portion of a product of~~providing higher value ~~than what is specified) . While~~products at the ~~DA segment was focused entirely on~~lower value products prices. More efficient operations have the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North ~~American markets in~~America include the ~~past, business development activities started in late third quarter 2020 in~~supermajors, some of the ~~international markets. This segment began preparing the~~largest midstream companies and large gas processing plants. We have developed a new line of Verax analyzers for ~~international~~ deployment ~~including product design modifications, certifications~~internationally which was recently certified for compliance in hazardous locations and ~~export controls.~~harsh weather conditions.

Research & Innovation

R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.

~~COVID-19 Effects~~Outlook

Our business is subject to numerous variables which impact our outlook and ~~Actions~~

~~In March 2020,~~expectations given the World Health Organization declared the outbreak of COVID-19 a global pandemic that spread throughout the U.S. and the world. In late 2020, major pharmaceutical companies developed vaccines and received approval for wide-scale distribution in the U.S. and other countries. The vaccination effort is proceeding in the U.S. and the world. However, variant strainsshifting conditions of the ~~virus~~industry and weather volatility. We have ~~emerged, which create additional uncertainty~~based our outlook on the ~~extent~~market and ~~the duration of the pandemic.~~weather conditions we perceive today. Changes often occur.

~~The pandemic negatively impacted the U.S.~~Energy

We expect North American and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets in 2020. These effects materially and adversely affected, and mayInternational onshore activity to continue to ~~materially and adversely affect, the demand for oil and natural gas as well as~~improve throughout 2022 from second quarter levels for the ~~Company’s services~~next nine months provided that commodity prices remain at or above current levels. The strongest potential growth throughout 2022 will likely comes from private, rather than publicly traded exploration and ~~products.~~

The Company’s CT segment is energy-focused with product lines comprised of specialty chemistries, logistics and technology services. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independentproduction companies. Private exploration and production companies ~~national~~operate the majority of U.S. land rigs and ~~state-owned oil~~react quickly to changing commodity prices. In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other service companies and ~~international supply chain management companies. Due to customer activity levels~~believe sales through indirect channels should accelerate in ~~this industry, the~~2022.

Industrial

The Company ~~experienced materially reduced revenues and cash flows during 2020, which continued for the first half of 2021.~~

~~Outside the oil and gas sector, the COVID-19 pandemic increased demand for certain specialty chemicals, particularly surface cleaners and disinfectants. In 2020, the Company launched~~has a diversified line of EPA and FDA compliant products that target industrial, agricultural and ~~EPA-compliant~~consumer markets with particular focus on customers that are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers, solvents and ~~solvents~~a multitude of proprietary chemistries for industrial, commercial and consumer use. ~~These products build on the Company’s historical expertise in chemistry~~The Company believes these adjacent markets diversify and leverage its infrastructure, personnel, competencies, supply chain, research and historic consumer market experience. The continued impact of COVID-19 and subsequent modification of social behavior in regard to the heightened attention to hygiene and sanitation provide a sustainable yet challenging market to expand the Company’s ~~portfolio.~~

portfolio of chemistry solutions to meet the growing demand. We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states. We will be training and educating their representatives during the next two quarters. The ~~DA segment’s largest customer base, the oil and gas midstream market, reduced gathering and infrastructure capital spending in 2020. In addition, the pandemic impacted the DA segment due~~leverage sales effort is anticipated to reduced access to facilities to complete new installations for a portion of the year. As a result, spending for the DA segment’s products and services has also been impacted by lower consumer demand. As a result,accelerate sales ~~and cash flows were below target for the DA segment.~~

The Company expects the current economic situation to negatively impact the energy sector for an extended period of time, with oil demand recovering during 2021 but not returning to the pre-COVID-19 level. Any further material COVID-19 disruption or significant setback in oil and gas demand arising from a slower economic recovery could negatively impact the Company and could result in additional impairments in the ~~future. Future developments~~second half of the COVID-19 crisis are uncertain and related implications could materially and adversely affect the Company’s business, operations, operating results, financial condition, liquidity and/or capital levels.2022.

While the full impact of the COVID-19 pandemic continues to evolve and the full extent of the impact is not yet known, the Company continues to closely monitor the effects of the pandemic on commodity demands, and on its customers, operations and employees. Any future developments and effects are highly uncertain and cannot be predicted, including:

•~~the scope and duration of the pandemic;~~

•~~effectiveness of vaccines;~~

•~~emergence of new coronavirus variants;~~

•~~further adverse revenue and net income effects; impairments;~~

•~~disruptions to the Company’s operations;~~

•~~third-party providers’ ability to support the Company’s operations;~~

•~~limitations on domestic and international travel for sales, system installations, and support;~~

•~~customer shutdowns of oil and gas exploration and production;~~

•~~the effectiveness of work from home arrangements;~~

•~~modifications to work schedules, including manufacturing shifts;~~

•~~impacts on employees from illness, school closures and other community response measures;~~

•~~any actions taken by governmental authorities and other third parties in response to the pandemic; and~~

•~~temporary closures of the Company’s facilities or the facilities of its customers and suppliers.~~Digital Analytics

The ~~pandemic caused the Company~~use of data and digital analytics is a growing trend in all industries where technology is leveraged to alter its business working practices, including work schedules, manufacturing shifts, employee travel, work locations, meetings and participation in events and conferences. In addition, the Company and mostanalyze large datasets of ~~its customers continued the practice of social distancing and work-from-home procedures, which have had, and may continue~~operational information to have, an impact on the ability of employees and management of the Company to communicate and work efficiently. These practices are gradually changing with increased vaccination levels in the U.S. and the world. There is no certainty that these actions will mitigate risks posed by the virus to the Company’s workforce.

In response to market conditions and the anticipating ongoing volatility, the Company reduced its cost structure in 2020 to meet anticipated market activity and reduce the Company’s break-even level. In the second half of 2020 the Company recorded additional impairment charges of goodwill and intangible assetsimprove performance, as well as anfor predictive maintenance, advanced safety measures and reduced environmental impact of operations. Verax has gained a foothold in North American markets for critical applications where compositional information is needed in real-time. The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We continue to work with our customers to identify further facilities and applications where our technology has the highest value. We expect to open and establish our international customer base with our new generation of internationally certified online analyzers. The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. We anticipate international sales to increase toover the ~~provision of excess and obsolete inventory.~~

~~Outlook~~

The COVID-19 pandemic negatively impacted the U.S. and global economy, disrupted global supply chains and the domestic and international oil and gas markets, and increased volatility in financial markets. While market prices for West Texas Intermediate and Brent crude oil rebounded from lows during the initialnext twelve months because of the ~~pandemic~~newly certified equipment. To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations. AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in ~~2020~~a liquids pipeline without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces within 60 seconds. This allows operators to ~~exceed $50 per barrel during the first quarter of 2021~~cut batches quickly and ~~$70 per barrel during the second quarter of 2021, many major integrated oil~~accurately, reduce transmix and gas companies and independent oil and gas companies have kept their 2021 budgets generally unchanged, though such budgets may change if crude oil prices increase. Uncertainty exists about the extent and the duration of the resulting industry contraction and consolidation. In addition, the oilfield services industry remains over supplied and the timing of returns to pre-pandemic pricing levels remains uncertain. While uncertainty remains around the extent and duration of the pandemic, there are positive indicatorsminimize off-spec product that ~~the U.S. economy is recovering, including improvements in oil and gas demand, rising COVID-19 vaccination levels, and resumption of travel and business activities.~~requires downgrades.

ESG

ESG-focused solutions continue to be ~~a focus~~an emphasis for the Company as the energy, ~~industry is~~industrial and consumer markets are seeking to accelerate their focus on ~~cleaner energy~~sustainability and ~~sustainability. The~~minimized impact ~~of the actions of the new presidential administration and Congress~~ on the economy and financial markets is uncertain in the current year and longer term. During his first months in office, the President signed many executive orders, including ones with implications for stakeholders in the energy industry, such as canceling the Keystone XL Pipeline and another for the U.S. to rejoin the Paris Agreement on climate change.environment. The U.S. Department of Interior (“DOI”) issued an order in January, placing a 60-day freeze on agency permit approvals and pausing federal oil and gas leasing for a review of all existing leasing and permitting practices related to fossil fuel development on public lands and waters. In March 2021, the DOI allowed the suspension to expire. In addition, the President announced proposed plans to raise the corporate tax rate to help finance his proposed infrastructure plan. These and other potential actions by the new administration could have negative and/or positive impacts on the Company’s business and customers.

~~Amid the current environment with increased business commitments related to ESG, the~~ Company’s products and services

offer a significant benefit to businesses seeking to improve their ESG performance, including improving ~~the~~ safety, reliability and

efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.

The Company believes ~~that an increase in~~the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of ~~green specialty chemicals could benefit~~ our ~~business~~greener practices and ~~reduce~~chemistries. We believe the ~~impact of the slow recovery from the 2020 lows in drilling and completions activity. The key sales~~performance-driven ESG focus of the Company ~~is growing market share by~~assists in reducing environmental liabilities and improving returns for ~~current customers, rebuilding relationships with past customers~~our customers.

Supply Chain

During 2020 and ~~identifying new customers~~2021 challenging supply chain issues emerged that are continuing throughout 2022 according to Secretary of Transportation Peter Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:

•Rising freight costs;

•Delays due to port congestion;

•Labor shortages and

•Demand forecasting.

All bidding will require the risk of shipping costs and delays to be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could ~~benefit from collaborative~~also result in supply disruption.

Weather

During the first six months of 2022 there were no major weather events that had a material impact on the first and innovative chemistry solutions. Additionally, the Company is focused on optimizing total cost of recovery per barrel of oil, reducing both financial cost and environmental risk associated with operationsecond quarter results.

COVID-19

The ~~disinfectants and surface cleaners industry is expanding, associated with the continued impact~~impacts of ~~the~~ COVID-19 pandemic and the need for individuals, businesses, schools and governments to minimize the spread of the coronavirus, as well preparing for emerging variants. Industry growth is also anticipated due to the modification of social behaviors in regard to the heightened attention to hygiene and sanitation. In 2020, the Company launched a diversified line of EPA and FDA-compliant disinfectants, surface cleaners, degreasers and solvents for industrial, commercial and consumer use. The Company believes this market provides an opportunity to expand the Company’s portfolio of chemistry products to meet the growing demand. The use of data and analytics is a growing trend in all industries where technology is used to analyze large datasets of operational information to improve performance, as well as predictive maintenance, advanced safety measures and reduced environmental impact of operations. The Company believes that data and analytics is an area for growth. Hence, in 2020, the Company acquired JP3 and formed the DA segment. Prior to and throughout the majority of 2020, the DA segment focused sales solely on North American markets; however, the segment is preparing for international deployments, including export control investigations, certifications and product design modifications to meet the demands of overseas installations.

The Company continues to develop technologies to ensure its ability to provide differentiated products and services to its customers. The Company remains focused on partnering closely with its customers to create and implement specialty chemical products and compositional analyzers. Differentiated products and services are the result of the deployment of the organization’s technical capabilities and expertise in alignment with customer success. The Company believes the pursuit of new solutions to help make its customers successful will continue to ~~position Flotek as a leader~~affect the U.S. and global economy. We believe our protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The resumption of travel has begun to accelerate and in ~~advanced chemicals and technology.~~

~~The Company’s emphasis~~person customer visits began in ~~2021 is executing~~earnest during the ~~plan established by~~first quarter of 2022, continued through-out the ~~executive team~~second quarter of 2022, will likely continue to recover from the varied impacts of COVID-19 and grow the Company’s businesses. The CT segment is focused on marketing our products and services to new and existing customers, while expanding the disinfectants, surface cleaners, degreasers and solvents product line. The DA segment is enhancing its product offerings and customer service while accelerating the business development and sales effort in both the domestic and international markets. The Company does not anticipate a material increase in our maintenance capital spending year-over-year. In 2021, the Company is enhancing its focus on ESG and the responsible management of products and services through our Quality Assurance and Quality Control Program and Chemical Spill Prevention Program, adhering to ISO 9001:2015 standards.accelerate.

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Consolidated Results of Operations (in thousands):

~~Consolidated~~ ~~Results of Operations: Three and Six Months Ended June 30, 2021, Compared to the Three and Six Months Ended June 30, 2020~~

Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Revenue $9,165 $ 8,880 $ 20,935 $ 28,296
Operating expenses (excluding depreciation and amortization) 12,110 11,632 25,911 34,473
Operating expenses % 132.1 % 131.0 % 123.8 % 121.8 %
Corporate general and administrative costs 2,868 5,395 7,229 9,888
Corporate general and administrative % 31.3 % 60.8 % 34.5 % 34.9 %
Depreciation and amortization 253 468 560 2,659
Research and development 1,466 1,638 3,008 4,193
Gain on disposal of long-lived assets (71) (22) (69) (55)
Impairment of fixed assets and long-lived assets — — — 57,454
Loss from operations (7,461) (10,231) (15,704) (80,316)
Operating margin % (81.4) % (115.2) % (75.0) % (283.8) %
PPP forgiveness 881 — 881 —
Gain on lease termination — 576 — 576
Interest and other income (expense), net 55 62 4 11
Loss before income taxes (6,525) (9,593) (14,819) (79,729)
Income tax (expense) benefit (21) 32 (27) 6,201
Net loss $ (6,546) $ (9,561) $ (14,846) $ (73,528)
Net loss % for continuing operations (71.4) % (107.7) % (70.9) % (259.9) %


	Three months ended June 30,						Six months ended June 30,
	2022			2021			2022			2021
Revenue
Revenue from external customers	$	12,824		$	9,165		$	23,206		$	20,935
Revenue from related party	16,549			—			19,046			—
Total revenues	29,373			9,165			42,252			20,935
Cost of goods sold	31,678			10,775			45,036			22,853
Cost of goods sold %	107.8		%	117.6		%	106.6		%	109.2		%
Gross profit (loss)	(2,305)			(1,610)			(2,784)			(1,918)
Gross profit (loss) %	(7.85)		%	(17.6)		%	(6.6)		%	(9.2)		%
Selling general and administrative	7,431			4,203			12,310			10,287
Selling general and administrative %	25.3		%	45.9		%	29.1		%	49.1		%


Depreciation and amortization	182			253			377			560
Research and development	1,115			1,466			2,530			3,008
Gain on sale of property and equipment	(1,914)			(71)			(1,906)			(69)

Gain on lease termination	—			—			(584)			—
Change in fair value of contract consideration convertible notes payable	(17,158)			—			(13,266)			—
Income (loss) from operations	8,039			(7,461)			(2,245)			(15,704)
Operating margin %	27.4		%	(81.4)		%	(5.3)		%	(75.0)		%
Interest and other income, net	(1,701)			936			(2,145)			885
Income (loss) before income taxes	6,338			(6,525)			(4,390)			(14,819)
Income tax expense	(98)			(21)			(94)			(27)
Net income (loss)	$	6,240		$	(6,546)		$	(4,484)		$	(14,846)

Consolidated revenue for the three months ended June 30, 2021, increased $0.3 million, or 3.2%, primarily due to the acquisition of JP3 in mid-May of the second quarter of 2020, which was partially offset by the loss of two major energy customers that were purchased by non-customers during the second quarter of 2021. Consolidated revenue for the and six months ended June 30, ~~2021, decreased $7.4~~2022 increased $20.2 million, or ~~26.0%~~220.5%, and $21.3 million or 101.8%, respectively, versus the same period of ~~2020. First half 2020 revenues experienced less COVID-19 impact than first half~~ 2021 ~~results. Second quarter 2021 experienced a loss of revenue in the CT segment associated~~driven by activity with ~~two major customers changing ownership during the quarter, partially offset by full-quarter revenue~~ProFrac starting in the second ~~quarter 2021 for JP3.~~quarter.

Consolidated ~~operating expenses (excluding depreciation and amortization)~~cost of goods sold for the three ~~months ended June 30, 2021, increased~~ ~~$0.5 million, or 4.1%, versus the same period of 2020,~~ and as a percentage of revenue, remained flat. The increase was primarily due to an unfavorable product mix in the second quarter of 2021 versus second quarter of 2020. Consolidated operating expenses (excluding depreciation and amortization) for the six months ended June 30, ~~2021 decreased $8.6~~2022, increased $20.9 million or ~~24.8%~~194.0%, and $22.2 million or 97.1%, respectively, versus the same ~~period of 2020, and 2.0% as a percentage of revenue. The decrease in operating expenses for the first half~~periods of 2021, ~~resulted from reduced cost~~primarily attributable to the increase in revenues. Cost of ~~sales~~goods sold were also impacted by one- time expenses incurred due to ~~lower sales activity during 2021 compared to 2020 associated with COVID-19 impacts and related declines in~~the ramp up of ProFrac activity. The Company’s operating expenses benefited from actions taken in 2020. Actions taken to reduce operating expenses include reducing the Company’s facility footprint and improving operational efficiencies. These reduced costs were partially offset by new operating expenses for the DA segment acquired in the second quarter of 2020.

~~Corporate~~Selling general and administrative (“CGSG&A”) expenses are ~~those expenses~~ not directly attributable to products sold or services provided. CGSG&A expenses for the three and six months ended June 30, 2022, increased $3.2 million or 76.8%, and $2.0 million or 19.7%, respectively, versus the same period of 2021. SG&A expenses increased as a result of higher professional fees relating to the ProFrac and PIPE transactions, higher employee costs due to an ERC credit reported in 2021 and decreased legal fees due to large expense incurred on two significant matters in 2021.

Depreciation of property and equipment decreased $0.1 million or 28.2%, for the three months ended June 30, 2022, versus the same period of 2021. Depreciation of property and equipment decreased $0.2 million or 32.7% for the six months ended June 30, 2022.

Research and development (“R&D”) costs for the three and six months ended June 30, ~~2021,~~2022 decreased ~~$2.5~~$0.4 million or ~~46.8%,~~23.9% and ~~$2.7~~$0.5 million or ~~26.9%~~15.9%, respectively, versus the same period of ~~2020.CG&A~~2021 due to lower personnel costs ~~declined~~ as a result of ~~lower compensation costs following~~ a reduction in ~~force,~~workforce and lower non-labor cost.

Income from operations increased by $15.5 million or 207.7% for the three months ended June 30, 2022, versus the same period in 2021. The income from operations increase is a ~~one-time employee retention credit related~~result of the revaluation of the contract consideration convertible notes payable and the gain on sale of property and equipment partially offset by higher SG&A expenses. For the six months ended June 30, 2022, loss from operations decreased by $13.5 million or 85.7% attributable mainly to the ~~CARES Act~~revaluation of the

contract consideration convertible notes payable and ~~a reduction~~gain on sale of property and equipment and partially offset by increased SG&A expenses.

Income before income taxes for the three months ended June 30, 2022, was impacted by interest charges of $1.6 million versus $17 thousand for the same period in ~~professional fees~~.2021. For the six months ended June 30, 2022 and 2021 interest charges were $2.3 million and $35 thousand respectively. The increased interest costs relate to payment in kind interest expense on the Contract Consideration Convertible Notes Payable.

~~Depreciation and amortization~~The Company’s income tax expense ~~decreased $0.2 million, or 45.9% and $2.1 million, or 78.9%~~ for the three and six months ended June 30, ~~2021, versus the same period of 2020, primarily due to impairments of fixed~~2022 and ~~long-lived assets recorded in the first quarter of 2020.~~

~~Research and development costs decreased $0.2 million, or 10.5% and $1.1 million, or 28.3% for the three and six months ended June 30,~~ 2021 ~~versus the same period of 2020 due to lower personnel costs as a result of our reduction in workforce during the first quarter 2020.~~

Impairment of fixed and long-lived assets decreased due to the first quarter 2020 write-down of $54.7 million in the CT segment and a corporate-level write-down of $2.8 million. See Note 8, “Impairment of Fixed and Long-lived Assets, in Item 1, Financial Statements, of this Quarterly Report.” No impairments of fixed and long-lived assets occurred in the first half of 2021.

Loss from operations decreased $2.8 million, or 27.1%, for the three months ended June 30, 2021 and $64.6 million, or 80.4% for the six months ended June 30, 2021, versus the same period in 2020. The loss from operations improvement is primarily a result of the $57.5 million impairment of fixed and long-lived assets in the first quarter of 2020 and no impairments in the first half of 2021. Additionally, the decrease in loss from operations is attributable to the forgiveness of the JP3 PPP loan for $0.8 million and a one-time employee retention credit to the CARES Act of $1.9 million, both recorded in the second quarter of 2021.

~~The Company’s income tax expense for the second quarter of 2021 and 2020~~ was minimal. The Company recorded an income tax benefit of $6.2 million for the first quarter of 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act initially recorded in the first quarter 2020.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations: ~~Three and Six Months Ended June 30, 2021, Compared to the Three and Six Months Ended June 30, 2020~~


		Three months ended June 30,				Six months ended June 30,
		2021		2020		2021		2020
											Three months ended June 30,				Six months ended June 30,
											2022		2021		2022		2021
Revenue	Revenue	$	7,688	$	7,962	$	17,990	$	27,378	Revenue	$	28,660	$	7,688	$	40,468	$	17,990

Loss from operations		(3,819)		(3,596)		(7,407)		(66,257)
Income (loss) from operations										Income (loss) from operations	14,944		(3,819)		8,887		(7,407)

CT revenue for the three and six months ended June 30, ~~2021, decreased $0.3~~2022 increased $21.0 million, ~~or 3.4%~~ and ~~$9.4~~$22.5 million, ~~or 34.3%,~~ respectively, ~~versus~~compared to the same periods of ~~2020.~~2021. The ~~decrease~~increased revenue in ~~revenue during~~2022 is driven mainly by the ProFrac contract commencing in the second quarter, of ~~2021~~which $16.5 million relates to the ProFrac Agreements along with a significant increase in revenue with two other major customers.

Income from operations for the CT segment for the three months ended June 30, 2022 improved by $18.8 million or 491% compared to the ~~second quarter~~same period of ~~2020 was driven by impacts from both the supply and the demand side.~~2021. The ~~COVID-19 pandemic negatively impacted economic activity and reduced global demand for oil and gas, a key sector of our customer base.~~ The Company’s domestic and international revenue for the first half of 2021 decreased as demand from major customers and smaller operators has not returned to the pre-pandemic levels of first quarter 2020. In addition, revenue from two major customers was lostimprovement is primarily as a result of ~~market consolidation~~the favourable revaluation of the Contract Consideration Convertible Notes Payable of $17.2 million. Excluding the revaluation there was an overall improvement in income from operations of $1.6 million for the three months ended June 30, 2022, attributable mainly to the gain on sale of property and equipment. Income from operations for the six months ended June 30, 2022 improved by $16.3 million or $220% compared to the same period of 2021. The improvement relates mainly to the revaluation of the Contract Consideration Convertible Notes Payable of $13.3 million and the gain on sale of property and equipment and lease termination.

Data Analytics Results of Operations:


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Revenue	$	713	$	1,477	$	1,784	$	2,945


Loss from operations	(1,198)		(773)		(2,006)		(1,067)

DA revenue for the three and six months ended June 30, 2022 decreased $0.8 million, and $1.2 million, respectively, compared to the same periods of 2021 due to less orders in 2022 and some projects being delayed to later in the ~~Permian basin.~~ year.

~~CT also granted price concessions due to maintain and obtain market share.~~

Loss from operations for the CTDA segment for the three and six months ended June 30, ~~2021, increased $0.2~~2022 worsened by $0.4 million or ~~6.2%~~55%, and ~~decreased $58.9~~$0.9 million or ~~88.8%~~88%, respectively, ~~versus~~compared to the same period of ~~2020.~~2021. The ~~increase in~~worsening loss from operations is ~~due to lower revenue and significantly lower expenses,~~ primarily ~~the~~as a result of ~~no impairments~~the decrease in the first half of 2021 versus impairment charges of fixed and long-lived assets of $57.5 million in the same period of 2020. Additionally, unfavorable product mix contributed to the increased loss from operations as compared to 2021. Secondly, expenses decreased due to the first quarter of 2020 including a $2.3 million terpene purchase commitment loss with no comparable activity in 2021. Personnel costs declined period over period by $1.0 million, which included first quarter 2020 severance costs of $0.6 million for reduction in force actions. Office costs and equipment and facilities costs decreased a combined $0.6 million period over period from the consolidation of the Company’s physical facilities and equipment rentals to align with activity.

~~Data Analytics~~ ~~Results of Operations: Three and Six Months ended June 30, 2021 and May 18 -June 30, 2020~~

Three months ended June 30, Period May 18- June 30, Six months ended June 30, Period May 18- June 30,
2021 2020 2021 2020
Revenue 1,477 918 $ 2,945 $ 918
Loss from operations (773) (1,151) (1,067) (1,151)

~~On May 18, 2020, the Company purchased JP3 and formed the DA segment. Segment revenue for the second quarter of 2021 was $1.5 million, which remained flat from the first quarter 2021.~~

~~Critical Accounting Policies and Estimates~~

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments, estimates, and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Part II, Item 8 — Financial Statements and Supplementary Data, Note 2 of “Notes to Consolidated Financial Statements” and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates” of the Company’s Annual Report, and the “Notes to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report describe the significant accounting policies and critical accounting estimates used to prepare the consolidated financial statements. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results of operations and require management’s most subjective judgments. The Company regularly reviews and challenges judgments, assumptions and estimates related to critical accounting policies, including goodwill and other intangible assets. There have been no significant changes in the Company’s critical accounting policies and estimates during the six months ended June 30, 2021.

~~Recent Accounting Pronouncements~~

Recent accounting pronouncements which may impact the Company are described in Note 2, “Recent Accounting Pronouncements,” in Part I, Item 1 — “Financial Statements” of this Quarterly Report.revenues.

Capital Resources and Liquidity

Overview

The Company’s ongoing capital requirements relate to the ~~need to acquire~~acquisition and ~~maintain~~maintenance of equipment and ~~fund~~funding working capital requirements. During the ~~first~~ six months ~~of 2021,~~ended June 30, 2022, the Company funded working capital requirements ~~primarily~~ with proceeds from warrants issued for $19.5 million and cash on hand.

As of June 30, ~~2021,~~2022, the Company had available cash and cash equivalents of ~~$27.8~~$33.1 million, as compared to ~~$38.7~~$11.5 million at December 31, ~~2020. The Company recorded an operating loss for~~2021. During the six months ended June 30, ~~2021 and recorded $11.2~~2022, the Company had an operating loss of $2.2 million, $23.9 million of ~~net~~ cash used ~~for~~in operating activities, $4.2 million cash provided by investing activities and ~~$0.3~~$39.4 million of ~~net~~ cash ~~used for~~provided by financing activities. ~~Cash used in investing activities was minimal.~~

Liquidity

The effects of the COVID-19 pandemic and the volatility in oil prices during 2020 and the first half of 2021 materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. While the full impact and duration of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. See “COVID-19 Effects and Actions” for developments and possible effects.

The Company currently funds its operations and growth primarily from cash on ~~hand.~~hand which includes the proceeds from the convertible notes and warrants received in the second quarter. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. ~~While~~Uncertainty surrounding the stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity

On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million (see Note 9, “Debt and Convertible Notes Payable”).

Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022. These Contract Consideration Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.

On June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $19.5 million in cash, net of issuance costs, (see Note 13, “Stockholders’ Equity”). The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $0.0001 per share.

The Company also sold its manufacturing facility in Waller, Texas. The sale closed on April 18,2022 with $4.3 million of gross proceeds.

Based on our cash and liquid assets, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet ~~its~~our capital requirements and anticipated obligations as they become due ~~a prolonged COVID-19 impact, a slower than expected recovery of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.~~

~~Accordingly, while~~in the ~~Company believes that its existing cash will enable it to fund its operations and growth,~~next 12 months. However the Company cannot guarantee ~~the~~a sufficient level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:

•~~Sale of non-core real estate properties;~~

•~~Sale-leaseback transactions of facilities;~~

•~~Sale of excess inventory and/or raw materials;~~

3136

•~~Entry into a borrowing facility with one or more lenders;~~

•~~Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash;~~

•~~Reducing professional advisory fees and headcount; and~~

•~~Raising equity either in the public markets or via a private placement offering.~~

However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms. For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in the Company’s Annual Report.

~~The Company expects capital spending to be less than $1.0 million in 2021.~~

Cash Flows

Consolidated cash flows by type of activity are noted below (in thousands):


		Six months ended June 30,					Six months ended June 30,
		2021		2020			2022		2021
Net cash used in operating activities	Net cash used in operating activities	$	(11,242)	$	(29,216)	Net cash used in operating activities	$	(23,915)	$	(11,242)
Net cash provided (used in) by investing activities		43		(16,424)
Net cash (used in) provided by financing activities		(273)		5,023

Net cash provided by investing activities						Net cash provided by investing activities	4,189		43
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	39,431		(273)
Effect of changes in exchange rates on cash and cash equivalents	Effect of changes in exchange rates on cash and cash equivalents	(31)		(31)		Effect of changes in exchange rates on cash and cash equivalents	95		(31)
Net change in cash, cash equivalents and restricted cash	Net change in cash, cash equivalents and restricted cash	$	(11,503)	$	(40,648)	Net change in cash, cash equivalents and restricted cash	$	19,800	$	(11,503)

Operating Activities

Net cash used in operating activities was ~~$11.2~~$23.9 million and ~~$29.2~~$11.2 million during the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Consolidated net loss for the six months ended June 30, 2022 and 2021, ~~and 2020, totaled $6.5~~were $4.5 million and ~~$73.5~~$14.8 million, respectively.

During the six months ended June 30, ~~2021,~~2022, non-cash adjustments to net income (loss) totaled ~~$1.8~~$10.0 million as compared to ~~$62.1~~$1.8 million for the same period of ~~2020.~~2021.

During the six months ended June 30, 2022, changes in working capital used $9.4 million of cash as compared to providing $1.8 million for the same period of 2021.

•For the six months ended June ~~30,2021, non-cash charges included $0.6~~30, 2022, changes in working capital resulted primarily from an increase in accounts receivable and inventories of $10.1 million ~~for depreciation, which was lower than the six months ended June 30, 2020~~and $4.5 million, respectively, due to increased revenue, change in contract asset ~~impairments taken~~of $3.6 million attributable to fees associated with the Contract Consideration Convertible Notes Payable and decreased accrued liabilities due mainly to payment of the ADM Settlement (Note 12, “Commitments and Contingencies”). This is partially offset by an increase in ~~2020, and a $0.3~~accounts payable of $12.2 million ~~charge related~~relating mainly to ~~the fair value of contingent consideration, stock based compensation of $1.8 million and JP3 PPP loan forgiveness of $0.9 million.~~purchases made to support our contract with ProFrac.

•For the six months ended June 30, 2020, contributory non-cash adjustments consisted primarily of $57.5 million of impairment charges, which included a $30.2 million impairment of fixed assets, $19.9 million impairment of intangible assets and $7.4 million of impairment of right-of-use assets. In addition, non-cash charges included $2.7 million for depreciation and amortization.

~~During the six months ended June 30, 2021, changes in working capital provided $1.8 million of cash as compared to using $17.8 million for the same period of 2020.~~

•~~For the six months ended June~~ 2021 the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable of $2.0 million, partially offset by a decrease in accrued liabilities of $1.0 million.

•~~For~~Investing Activities

Net cash from investing activities for the six months ended June 30, ~~2020,~~2022 was $4.2 million from the use of cash in working capital primarily resulted from a reduction in accrued liabilities and accounts payable of $26.9 million, which included two one-time payments made: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final post-closing working capital adjustment related to the 2019 sale of the ~~Company’s~~ ~~Consumer and Industrial Chemistry Technologies segment. Decreases~~manufacturing facility in ~~accounts receivable, inventories and other current assets provided cash of $15.4 million.~~

~~Investing Activities~~Waller, Texas which closed on April 18, 2022.

Net cash ~~provided by~~from investing activities for the six months ended June 30, 2021 was ~~not material.~~ negligible.

Financing Activities

Net cash ~~used in investing~~provided by financing activities was ~~$16.4~~$39.4 million for the six months ended June 30, ~~2020. Cash used in investing activities included $26.3 million~~2022, primarily from ~~purchase~~the proceeds of ~~JP3~~the issuance of convertible notes and warrants partially offset by ~~cash provided of $9.8 million due~~issuance costs relating to the ~~release of escrow amounts from the sales of Florida Chemical Company.~~

~~Financing Activities~~convertible notes.

Net cash used in financing activities was $0.3 million for the six months ended June 30, 2021, primarily for purchases of common stock related to tax withholding requirements. ~~Net cash provided by financing activities was $5.0 million for the six months ended June 30, 2020, primarily from the proceeds received from the Paycheck Protection Program.~~

Off-Balance Sheet Arrangements

There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2021, the Company was not involved in any unconsolidated SPEs.

The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to ~~investors other than~~investors.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the ~~long term terpene agreement discussed in~~Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported. Note 132, “Summary of Significant Accounting Policies” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item ~~I –~~1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of ~~this Quarterly Report.~~the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures ~~About~~about Market Risk

The Company is exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of the Company’s Annual Report.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.

The Company identified deficiencies in its internal control over financial reporting that represented material weaknesses as of December 31, 2020. Specifically, the Company’s management determined that the Company did not, as of December 31, 2020, design and maintain effective internal controls over financial reporting. The material weaknesses relate to: (1) ineffective design and operation of controls over nonrecurring transactions, including recognition of items and cash flow presentation relating to disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations; (2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations; and (3) the ineffective design and operating effectiveness of the assessment of going concern.

~~The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in~~Based upon this Quarterly Report present fairly, in all material respects, the consolidated financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.

~~The Company’s management, including its~~evaluation, our principal executive officer and principal financial officer have ~~evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined by Rule 13a-15(e) and 15d-15(e) of the~~

~~Exchange Act as of June 30, 2021, and has~~ concluded that ~~the Company’s~~our disclosure controls and procedures were ~~not~~ effective as of June 30, ~~2021, due to the material weaknesses in internal control over financial reporting described above.~~

~~Remediation Plan and Status~~

~~The Company has implemented a remediation plan to address the material weaknesses identified at December 31, 2020. Key elements of this ongoing plan include:~~2022.

•
~~Implementing monitoring controls over the review and validation of both tangible and intangible assets;~~

•~~Expanding controls over impairments of goodwill and long-lived assets;~~

•~~Enhancing specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;~~

•~~Implementing controls for forecasting and budgeting, to include additional process documentation and precision;~~

•~~Expanding monthly management review controls; and~~

•~~Enhancing existing control procedures around the quarterly going concern analysis process.~~

In 2021, the Company made a strategic decision to bring internal audit in-house and hired a director of internal audit to manage internal controls and the remediation plan. Through a structured process of testing and monitoring elements of the remediation plan, we expect the identified material weaknesses to be fully remediated by the end of 2021.

Changes in Internal ~~Control Over~~Controls over Financial Reporting

There have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended June 30, ~~2021,~~2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

3438

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

~~Litigation~~

~~On March 26, 2021,~~There are no material changes since the ~~Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company,~~Company’s Annual Report on Form 10-K filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and Joshua A. Snively in state court in Harris County, Texas. The lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty by Mr. Snively. Contemporaneously with the ~~filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.~~

~~Subsequent to the lawsuit described above,~~SEC on April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters. The Company views this lawsuit as a strategic response to the March ~~26, 2021 lawsuit filed by Flotek Chemistry and the Company in Texas.~~

The Company believes that, notwithstanding the termination of the supply agreement, it has sufficient terpene inventory and alternate terpene supply sources to meet its requirements for the foreseeable future. The Company does not expect that termination of the terpene supply agreement will have a material effect on its operations or ability to meet customer needs.

The Company is subject to other routine litigation and other claims that arise in the normal course of business. Except as disclosed above, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

31, 2022.

Item 1A. Risk Factors

~~There~~In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors contained in “Item 1A.-Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), which could materially affect our business, financial condition and/or future results. As of June 30, 2022, there have been no material changes ~~to the~~in our risk factors from those set forth in ~~Part I, Item 1A of~~ the ~~Company’s~~ Annual Report. The risks described in the Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.

Item 2. Unregistered Sales of Equity Securities ~~and Use of Proceeds~~

Unregistered Sales of Equity Securities

~~None.~~Disclosures in Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’Equity”, of the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 are incorporated by reference hereto.

Issuer Purchases of Equity Securities

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock. Repurchases of the Company’s equity securities during the three months ended June 30, ~~2021,~~2022, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share



April 1, 2022 to April 30, 2022	43,280	1.36
May 1, 2022 to May 31, 2022	16,344	1.19
June 1, 2022 to June 30, 2022	989	1.06
Total	60,613

Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
April 1, 2021 to April 30, 2021 56,219 $ 1.75
May 1, 2021 to May 31, 2021 — —
June 1, 2021 to June 30, 2021 — —
Total 56,219

(1) The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options and (b) to satisfy payments required for common stock upon the exercise of stock options.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~

None.

3639

Item 6. Exhibits


Exhibit Number		Description of Exhibit
~~2.1~~		Share Purchase Agreement, dated as of January 10, 2019, by and between the Company and ADM (portions of this exhibit have been omitted pursuant to a confidential treatment request, which has been granted) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on March 4, 2019).1
~~2.2~~		Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers party thereto, and John A. Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on May 19, 2020).1
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2007).
3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
3.3		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Flotek Industries, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on May 7, 2020).
3.4		Second Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.4 to the Company’s Form 10-K filed on March 16, 2021).
4.1		Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive Proxy Statement filed on September 27, 2001).
4.2		Form of Convertible Note (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on February 4, 2022).
4.3		Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on February 4, 2022).
4.4		Form of Pre-Funded Warrants (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on June 23, 2022).
10.1	***	Amendment No. 1 to Chemical Products Supply Agreement between Flotek ~~Industries, Inc. 2018 Long-Term Incentive Plan~~Chemistry, LLC and ProFrac Services, LLC dated May 17, 2022 (incorporated by reference into Exhibit 10.1 to the Company’s Form 8-K filed on ~~June 7, 2021)~~May 18, 2022).

10.2		Registration Rights Agreement, by and between Flotek Industries, Inc. and ProFrac Holdings II, LLC dated May 17, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 18, 2022).
10.3		10% Convertible PIK Note dated May 17, 2022 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on May 18, 2022).
10.4		Securities Purchase Agreement between Flotek Industries, Inc. and ProFrac Holdings II, LLC dated June 17, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 23, 2022).


10.5		Amendment No. 1 to Registration Rights Agreement Flotek Industries, Inc. and ProFrac Holdings II, LLC dated June 21, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on June 23, 2022).
10.6	*	Separate and Release Agreement between Michael Borton and Flotek Industries, Inc. dated July 4, 2022.

























31.1	*	Rule 13a-14(a) Certification of Principal Executive Officer.
31.2	*	Rule 13a-14(a) Certification of Principal Financial Officer.

32.1	**	Section 1350 Certification of Principal Executive Officer.
32.2	**	Section 1350 Certification of Principal Financial Officer.

~~101~~101.INS	*	Inline XBRL Instance Document - The ~~following financial information from Flotek Industries, Inc.’s Quarterly Report on Form 10-Q for~~instance document does not appear in the ~~period ended June 30, 2021, formatted in~~ interactive data file because its XBRL tags are embedded within the inline XBRL document
101.SCH	*	Inline Extensible Business Reporting Language (iXBRL): (i) the Unaudited Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020, (ii) the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended June 30, 2021 and 2020, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020, (v) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020, and (vi) Notes to Condensed Consolidated Financial Statements.XBRL Schema Document
101.CAL	*	Inline XBRL Calculation Linkbase Document
101.LAB	*	Inline XBRL Label Linkbase Document
101.PRE	*	Inline XBRL Presentation Linkbase Document
101.DEF	*	Inline XBRL Definition Linkbase Document
104	*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*		Filed ~~herewith.~~with this Form 10-Q.
**		~~This certification is deemed~~Furnished with this Form 10-Q, not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. filed.
1***		Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules upon request by the ~~SEC.~~U.S. Securities and Exchange Commission or its staff.

3740

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 10, 2022



FLOTEK INDUSTRIES, INC.

By:		~~/s/ JOHN~~ /s/ John W. ~~GIBSON, JR.~~Gibson, Jr.
		John W. Gibson, Jr.
		President, Chief Executive Officer and
		Chairman of the Board

~~Date:~~	~~August 9, 2021~~


~~FLOTEK INDUSTRIES, INC.~~

By:						/s/ ~~MICHAEL E. BORTON~~
						~~Michael E. Borton~~
						~~Chief Financial Officer~~Seham Carson
						Seham Carson
~~Date:~~						~~August 9, 2021~~Interim Chief Financial Officer (Principal Financial and Accounting Officer

3841


	Three months ended June 30, 2020
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, March 31, 2020	64,338	$	6	4,395	$	(33,529)	$	348,375	$	58	$	(206,205)	$	108,705
Net loss	—	—		—	—		—		—		(9,561)		(9,561)
Foreign currency translation adjustment	—	—		—	—		—		(7)		—		(7)

Stock issued under employee stock purchase plan	—	—		(12)	—		9		—		—		9



Restricted stock granted	1,788	—		—	—		—		—		—		—
Restricted stock forfeited	—	—		37	—		—		—		—		—
Treasury stock purchased	—	—		39	(37)		—		—		—		(37)
Stock compensation expense	—	—		—	—		1,059		—		—		1,059



Stock issued in JP3 acquisition	11,500	1		—	—		8,537		—		—		8,538
Balance, June 30, 2020	77,626	7		4,459	(33,566)		357,980		51		(215,766)		108,706



	Six months ended June 30, 2020
	Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Stockholders’ Equity
	Shares Issued	Par Value		Shares	Cost
Balance, December 31, 2019	63,657	$	6	4,145	$	(33,484)	$	347,564	$	181	$	(142,238)	$	172,029
Net loss	—	—		—	—		—		—		(73,528)		(73,528)
Foreign currency translation adjustment	—	—		—	—		—		(130)		—		(130)

Stock issued under employee stock purchase plan	—	—		(25)	—		20		—		—		20



Restricted stock granted	2,469	—		—	—		338		—		—		338
Restricted stock forfeited	—	—		278	—		—		—		—		—
Treasury stock purchased	—	—		61	(82)		—		—		—		(82)
Stock compensation expense	—	—		—	—		1,521		—		—		1,521



Stock issued in JP3 acquisition	11,500	1		—	—		8,537		—		—		8,538
Balance, June 30, 2020	77,626	$	7	4,459	$	(33,566)	$	357,980	$	51	$	(215,766)	$	108,706



	June 30, 2021		December 31, 2020
Loss on purchase commitments (Note 13)	$	9,383	$	9,402
Severance costs	3,419		3,558
Payroll and benefits	994		1,789
Contingent liability for earn-out provision	1,115		1,416
Taxes other than income taxes	633		544
Due to third parties	504		434
Legal costs	721		333
Deferred revenue, current	152		146

Other	300		653


Total current accrued liabilities	$	17,221	$	18,275


							Balance at June 30,								Balance at December 31,
	Level 1		Level 2		Level 3		2021		Level 1		Level 2		Level 3		2020
Contingent consideration	$	0	$	0	$	1,115	$	1,115	$	0	$	0	$	1,416	$	1,416



For the three months ended June 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2021
Net revenue from external customers	$	7,688	$	1,477	$	0	$	9,165
Loss from operations, including impairment	(3,819)		(773)		(2,869)		(7,461)
Depreciation and amortization	233		20		0		253
Additions to long-lived assets	13		0		0		13

2020
Net revenue from external customers	$	7,962	$	918	$	0	$	8,880
Loss from operations, including impairment	(3,596)		(1,151)		(5,484)		(10,231)
Depreciation and amortization	246		131		91		468
Additions to long-lived assets	0		0		0		0


For the six months ended June 30,	Chemistry Technologies		Data Analytics (1)		Corporate and Other		Total
2021
Net revenue from external customers	$	17,990	$	2,945	$	0	$	20,935
Loss from operations, including impairment	(7,407)		(1,067)		(7,230)		$	(15,704)
Depreciation and amortization	524		35		1		$	560
Additions to long-lived assets	31		0		0		$	31

2020
Net revenue from external customers	$	27,378	$	918	$	0	$	28,296
Loss from operations, including impairment	(66,257)		(1,151)		(12,908)		(80,316)
Depreciation and amortization	2,056		131		472		2,659
Additions to long-lived assets	42		0		0		42


2020
Customer A	$	2,004	22.6	%	* (1)	* (1)
Customer B	1,246		14.0	%	* (1)	* (1)


2020
Customer C	$	8,324	29.4	%	* (1)	* (1)
Customer A	3,536		12.5	%	* (1)	* (1)
Customer D	3,485		12.3	%	* (1)	* (1)


	Three months ended June 30,	Period May 18- June 30,	Six months ended June 30,		Period May 18- June 30,


	2021	2020	2021		2020
Revenue	1,477	918	$	2,945	$	918


Loss from operations	(773)	(1,151)	(1,067)		(1,151)